1. Reinsurance Application
Presented By
Alice Shumba
Head- Underwriting FBC Reinsurance

2. Training Objectives Define and understand the purpose of Reinsurance
By the end of the course, we should be able to:
Define and understand the purpose of Reinsurance
Identify Types and Forms of reinsurance
Appreciate Application of Facultative Reinsurance
Appreciate Application of Treaty Reinsurance
Design a reinsurance Program

3. What is reinsurance?......
The business of insuring an insurance co. or underwriter against suffering too great a loss from their insurance operations. Robert & Stephen Kiln- Reinsurance in Practice
Transfer of part of the hazards or risks that a direct insurer assumes by way of insurance contract or legal provision on behalf of an insured, to a second insurance carrier, the reinsurer, who has no direct contractual relationship with the insured.’ M Grossmann, Reinsurance – An Introduction
A relationship between two consenting adults.

4. ……What is reinsurance? The Insurance Chain
Insured
Retail Broker
Insurer/Cedant
Reinsurance Broker
Reinsurer/
Retrocedant
Retro

5. What is reinsurance PURPOSE OF REINSURANCE
Spreading risks recall the insurer’s risk transfer options
Increasing Capacity
Stabilizing results
Managing Accumulations
Providing Expertise
Facilitating entry into new lines or territories
Tax advantage
Providing Security
Increasing stakeholder confidence
Managing Solvency to meet regulatory requirements
Cash-flow advantages- proportional treaties

6. Types of Reinsurance Facultative Reinsurance Treaty Reinsurance
Facultative Obligatory
Business can be place on a proportional or Non Proportional basis

7. FORMS OF REINSURANCE REINSURANCE FACULTATIVE PROP QUOTA SHARE
NON- PROP
EXCESS OF LOSS
TREATY
SURPLUS
NON PROP
STOP LOSS

8. Types of Reinsurance FACULTATIVE
It’s the oldest form of reinsurance
Optional
Ideally preserved for individual reinsurance of large or hazardous single risks lets examine the following
Motor? Engineering Plant? House owners? Mine assets?
Risks usually ceded on original terms.
Traditionally placed on proportional basis but non- prop now more common.

9. Types of Reinsurance FACULTATIVE
We opt for Fac when:
Original risk is hazardous- pollution
The risk exceeds the insurer’s treaty capacity- Large risk
The risk is excluded from insurer’s treaty- territorial scope, hazardous, more specifically insured elsewhere E.G Terrorism
A risk has been accepted by the cedant for unique commercial, financial or political reasons. Otherwise it would be unacceptable because of its nature and size. THINK OF SUCH RISKS

10. ADVANTAGES OF FAC DISADVANTAGES OF FAC
FACULTATIVE
ADVANTAGES OF FAC
DISADVANTAGES OF FAC
Freedom on whether or not to offer risk to a reinsurer of choice
Insurer can’t be certain of placement if there is no automatic cover. There can be delays in confirming cover until placement is done
Opportunity for reinsurer and cedant to build a relationship and understand each other’s underwriting styles
Reinsurer may require too much detail where if they are a competitor, insurer may be uncomfortable
Insurer may gain expertise on underwriting particular risks
Labor intensive & high admin costs- Errors (you may forget to place risk)
Protects treaty performance
Reinsurer may take over control of underwriting and claims processes. Warranties, Surveys, appointment of assessors etc.
Fac Reinsurer may eventually get accepted as a treaty security
Reinsurer may exercise influence on the insurer’s standard assessment of risk. Insurer rates Motor 3% but reinsurer rates it 10%.

11. Types of reinsurance TREATY REINSURANCE
Treaty reinsurance is obligatory in nature for both parties to the contract
Business is placed as a bouquet unlike fac where placement is on a single risk
Limits, terms and conditions are set for the whole bouquet.
Terms are agreed in advance usually at the beginning of the year.
Sometimes labeled blind cover

12. Types of reinsurance TREATY REINSURANCE
Insurers use treaty when:
Risks are homogenous or have similar exposures……not hazardous
There is a large number of such risks – volume
S/I can be confidently placed within range of each other…..size
there is reinsurance capacity for the types of risk…..terrorism treaty

13. Treaty reinsurance PROPORTIONAL TREATIES
Two main types in use are Quota Share and Surplus.
Prop treaties directly compensate acquisition costs through commissions.
Reinsurers cap liability using cession limit as well as event limit.
Reinsurers follow usually original terms
Accounting usually done in arrears and on an offset basis through submission of a monthly or quarterly return with or without a bordereaux

14. Treaty reinsurance Proportional treaty
Contents of a bordereaux
Insured’s Name
Period of Insurance & Period of Reinsurance
Sum Insured
Reinsurer’s proportion /Retention
Reinsurer’s amount /Ceded risk
Gross Premiums allocated by class of business
Premium split between cedant and reinsurer
Deductions

15. Proportional treaties COMMISIONS
Pricing of prop treaties is basically on the commission level.
The more profitable and balanced an account is the more the commission.
Types of commission
Flat commission
Sliding scale commission- Linked to loss ratio
Profit commission

16. Quota Share
Risk, premiums, and losses are allocated between cedant and reinsurer in the same fixed share.
Reinsurers participates in every risk and loss
Note - a quota share is usually named by the amount ceded i.e a 60% quota share means 60% has been ceded and 40% retained.
Mostly used when the S/I in a portfolio are relatively uniform e.g in motor or households
Quota shares carry the highest ceding commissions
More ideal when fronting, entering new lines or territory
Most ideal for reciprocal business
Ideal example of follow the fortunes.

17. Quota Share COMPONENTS OF QUOTE

18. Surplus
Cessions only done for risks that exceed the set retention level (line size)
Cessions will be done in multiples of the line up to the agreed cession limit
Reinsurers only participates on losses from the ceded risks i.e cedant carries all losses coming out from the retained risks
Usually subjected to table of retentions
Ideal when portfolio contains a mixture of large, medium and small size risks
Cedant retains more premium than under Quota share
The risk of unbalanced treaty is high

19. Surplus Treaty COMPONENTS OF QUOTE

20. Comparison of Q/S & Surplus
Q/S generally has higher commissions
More premium is usually ceded under Q/S
You cannot vary the retention % on a Q/S
Reinsurer & cedant’s fortunes are similar under Q/S but may be different under Surplus i.e one can make profit while the other makes a loss
Surplus treaty has better cat protection
With surplus, the insurer either stands or falls by the retention level chosen

21. Some Maths +÷×- SUM INSURED PREMIUM LOSS 1 LOSS 2 RISK A 10,000,000
100,000
12,000,000
8,000,000
RISK B
120,000
200,000
RISK C
4,000,000
400,000
800,000
1,500,000
RISK D
80,000
600,000
2,500,000
DO THE ALLOCATION OF RISK, PREMIUM AND LOSSES UNDER THE FOLLOWING PROGRAMES
90% QUOTA SHARE ARRANGEMENT WITH $9M CESSION LIMIT
9 LINE SURPLUS TREATY WITH A RETENTION OF $1,000,000

22. Risk A answer Retained Risk % Retained Risk Amt Ceded Risk %
Ceded Risk Amt
90% Q/S
10%
$1,000,000
90%
$9,000,000
9 Line Surplus
Premium allocation
Q/S retention= 10% X $100,000= $10,000
Q/S cession= 90%X $100,000=$9,000,000
Surplus retention= 1/10 X $100,000= $10,000
Surplus cession= 9/10 X $100,000=$9,000,000
Loss Allocation
Q/S retention= 10% X $10,000,000 (limit) = $1,000,000
Q/S cession= 90%X $10,000,000=$9,000,000
Surplus retention= 1/10 X $10,000,000= $1,000,000
Surplus cession= 9/10 X $10,000,000=$9,000,000
The risk is for $10m so there maybe underinsurance
The same calculation applies for 2nd loss

23. Risk B answer 90% Q/S 9 Line Surplus
Retained Risk%
Retained Risk Amt
Ceded Risk %
Ceded Risk Amt
Fac %
Fac Amt
90% Q/S
8.33%
$1,000,000
75%
$9,000,000
16.67%
$2,000,000
9 Line Surplus
Note the inclusion of facultative. Risk is above treaty capacity ( More when we do designing) How did we get 75% on a 90% quota share treaty???
If quota share did not have cession limit which is highly unlikely, then the Q/S contribution will remain 90%
Premium allocation
Straight forward
Loss Allocation
Use the same % distribution even for the $200k claim. Note fac reinsurers still participate on the $10m claim with 16.67% share

24. Risk C answer Retained Risk % Retained Risk Amt Ceded Risk %
Ceded Risk Amt
90% Q/S
10%
$400,000
90%
$3,600,000
9 Line Surplus
25%
$1,000,000
75%
$3,000,000
Premium allocation
Q/S retention= 10% X $400,000= $40,000
Q/S cession= 90%X $400,000=$360,000
Surplus retention= 25% X $400,000= $100,000
Surplus cession=75%X $400,000=$300,000
Loss Allocation
Q/S retention= 10% X $800K = $80K And Loss 2 10% x $1m= $100k
Q/S cession= 90%X $800k=$720k and Loss 2 90%x $1m=$900k
Surplus rtn= 25% X $800k= $200k and loss 2 25% x $1m= $250k
Surplus cession= 75% X $800k=$600k & loss 2 75%x $1m=$750k
Note treaties have similar 100% capacities but operate differently because of movement in retention % on surplus

25. Risk D answer Retained Risk % Retained Risk Amt Ceded Risk %
Ceded Risk Amt
90% Q/S
10%
$80,000
90%
$720,000
9 Line Surplus
100%
$800,000 0% $0
Premium allocation
Q/S retention= 10% X $80,000= $8,000
Q/S cession= 90%X $80,000=$72,000
Surplus retention= 100% X $80,000= $80,000
Surplus cession= NIL
Loss Allocation
Q/S retention= 10% X $600K = $60K And Loss2 10% x $800k= $100k
Q/S cession= 90%X $600k=$540k and Loss 2 90%x $800K(limit) =$720k
Surplus rtn= 100%X $600k= $600k and loss 2 100% x $2.5m= $2.5m
Note- even if a claim is above the surplus retention point, The cession of the risk guides the allocation of losses.

26. Non Proportional Treaty
Unlike prop treaties, premium paid is not proportionally related to risk carried.
Premiums usually paid in advance as Minimum and/or Deposit Premium. There is no cession per risk rather the premium is for the whole portfolio.
Distribution of Liabilities is based on losses rather than sum insured. So no need for cession bordereaux
Losses only get paid once they exceed the excess point/deductible.
Reinsurers limit their horizontal liabilities through Reinstatements.
There is usually a limit on cover to cap reinsurers’ vertical liability. If the excess of loss is protecting a prop treaty, its maximum retention can be used as the cover limit for Excess of loss.
No commissions paid under non proportional treaties

27. Non prop treaties PRICING
Pricing of Non Prop treaties can be done using
Exposure rating
Size, volume and nature of book
Average S/I in comparison with Cover Limit
Level of deductible
Volatility of claims in the reinsured class
Experience rating
Burning cost based on e.g - 5 year Loss Ratio + loading for inflation, costs and profit margin
Claims experience can warrant an increase or reduction in loss ratio

28. Non Proportional treaties PRICING
Resultant Rate is applied to EGNPI to get provisional premium/ MDP.
An Adjustment premium is paid at the end of the year when the AGNPI is known.
GNPI (Gross Net Premium Income) is the Gross premium before deducting commissions but net of other reinsurances.
The treaty can be Layered and priced according to exposure to losses
The 1st layer is usually the working layer hence will attract a higher rate.

29. Non Proportional Treaties Excess of Loss
Excess of loss can be used to protect the following :
Risk Exposure
EML error exposure
Catastrophe Exposure – Know definition of event e.g 72 hrs clause
Clash Exposure- Accumulation of different risk classes in one event
One program may offer all this protection

30. Non Proportional Treaties Components of XL Quote

31. Non Proportional Treaties ALLOCATION OF LOSSES
In the quote above. Losses are paid once they exceed deductible.
The Xl treaty covers the Ultimate Net loss to insured i.e loss that remains for the insured’s net account after other reinsurances have paid their proportions.
Reinstatement premium is immediately deducted from the claim amount using this formula:
(Loss to layer ÷ Cover Limit for layer) X Premium…..if it is 100% pro-rata to amount only
X (days remaining in the year/365) ……if it is pro-rata amount and time

32. XL Losses worked Example
Using Risk A Loss 1: details were as follows
Retained Risk $1m which is the cover limit on XL
Retained loss was $1m. Using the above XL program Recovery will be calculated as follows:
Loss to 1st layer $1,000,000- $350,000= $650,000
Reinstatement Premium ($650,000/$1,650,000) X $ = $
When paying the claim deduct reinstatement premium i.e ($650k- $105,3k)= $

33. Work to do
Using the above XL program. Calculate amount paid to insurer on the following losses UNL. Assume Limit per risk of $4million
Sum Insured $3m Loss $200,000 D.O.L. 05/01/14
Sum Insured $2m Loss $1,500,000 D.O.L 25/01/14
Sum Insured $4m Loss $2,500,000 D.O.L 30/03/14
Sum Insured $8m Loss $4,000,000 D.O.L 28/08/14* how far are you with reinstatement premium?
Sum Insured $700k loss $600,000 D.O.L 15/10/14* do you still have enough cover?

34. Stop Loss & Aggregate XL
Stop Loss operates on pre agreed % while Aggregate XL cover is expressed as fixed limits.
They are used to protect losses in a particular class or an aggregation of an event. The insurer’s loss ratio is limited to a particular level and reinsurer will kick in up to the agreed limit.
Most suitable in businesses where losses can have unpredictable spikes e.g in weather related covers like Hail insurance.
Losses are only recoverable when the aggregate exceeds the deductible

35. Stop Loss QUOTATION EXAMPLE

36. Basis of Reinsurance
Treaties can be placed using any of the following Basis:
Risk attaching during- Reinsurance in force when policy commenced and received the ceded premium will pay claim.
Losses Occurring During- Reinsurance in force at date of loss
Claims made during- reinsurance in force when the insurer is first made aware of the claim will respond.

37. REINSURANCE DESIGNING CONSIDERATIONS
You want to determine whether you buy fac, prop or non prop treaty or a combination of all. Look at:
Nature of the portfolio
Volume- Do you have sufficient numbers to have a treaty
Mix- Is there homogeneous exposure in your book, it may all be motor but 50% could be excluded risks in your treaty
Size- Can you chose XL or quota share- Are the sums insured within same range or vary significantly
Are there policies with unlimited Liability
Is portfolio subject to wide fluctuations in its annual results

38. Considerations
Capacity required- Do you really need it, is there automatic reinsurance capacity for your risks. A treaty should at least cover the majority of risks written.
Retention- your capital and risk appetite can determine this. Market norms can be a guide. No retention at all poses moral hazard
Reinsurance costs- For XL you pay upfront, for prop you may cede more premiums
How claims will be shared.
Exposure to accumulations
Loss experience
Cost of operating the reinsurance program

39. Considerations
Reinsurers will require the following information to make a judgment on required cover as well as to price it.
Risk profiles
5 year losses statistics
Required capacity/ Cat Limits
Estimated Income
Desired retention level by cedant
Classes of business covered
Potential accumulation for Reinsurer- Fac Inwards

40. Consideration Reinsurer will also make a judgment on
Standard of Management style
Experience of underwriters
Geographical distribution of business written
Financial standing of cedant
Past underwriting results
Exclusions, terms and conditions on the requires treaty.

41. Lets Design Using Risk Profile

42. Designing Reinsurer May insist on deductible of at least $250,000.
Insurer may want treaty cover up to $6,000,000
Is insurer willing to pay upfront XL premium for $6 million cover in that case $5.75m Xs $250K. Will reinsurer be able to give you that and at what price? Note deductible is 4% of limit.
Insurer may combine XL , Surplus and Fac. So you have 5 line surplus with retention of $1m. Giving total treaty capacity of $6m. Retention will be protected by XL of $750k Xs $250k. All risks above $6m will be placed on Fac basis

43. Another Example

44. This example consists of balanced spread of small risks
This example consists of balanced spread of small risks. An XL might be ideal
There may be need for proportional cover protected by an XL. However, will the deductible amount remain reasonable?
There really isn’t much need for Fac except for the 4 risks above $200k
Most likely a motor account

45. THE END