Beruflich Dokumente
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Proportional Treaties
1
What is Reinsurance?
2
What is Retention?
Retention is an amount,
an insurance company is willing
to risk for its own account
from a single loss
3
Why Reinsurance ?
An Insurance Company has its own limitations
to write business, linked to:
Its Capital and Free Reserves.
Size of the Risk, its Occupation & Premium
Accumulation of RisksPremium.
Profitability of Portfolio
4
Methods of Reinsurance
5
Facultative RI
Characteristics
Similar to co-insurance;
Simplest and oldest method;
6
Facultative RI
Advantages
In case of a small portfolio, where Treaty is
unattractive;
Where risk is outside the scope of the Treaty - e.g.
excluded class or Geographic Scope;
Where S I exceeds the Treaty Limit;
Expertise and capacity of big reinsurance can be
used,
Where the risk is hazardous and might destabilise
the Treaty
7
Facultative RI
Disadvantages
Full disclosure of the material facts.
Delay in seeking support.
administration.
Lower rates of commission.
No Profit Commission.
8
Premium and Loss Distribution in
Facultative RI
9
Accounts for Facultative
Since Fac RI is a single risk transaction,
rendering of statement of premium & Claims
known as Closing is on individual basis.
At times there is PPW & the Cedant and the
Broker must adhere to it.
Closing must follow within a reasonable time
after the signed line is advised and certainly
before the expiry of the PPW. If for any
reason, there is a delay, Reinsurers
permission needs to be taken for extension of
PPW.
10
Accounts for Facultative
12
What is a Treaty?
13
Quota Share Treaty
Characteristics
Obligatory in nature.
Retention and cession on every risk
Operates on fixed percentage basis.
Meaningful retention required
Advantages
Simple form & easy to operate and administer.
Works like a partnership & Useful for a new company or for a new class of business,
where the results of business are unpredictable.
Useful for reciprocal exchange.
Disadvantages
Inflexible method of RI (unless VQS). Fixed percentage of premium on each ceded risk
forces large outflow of Premium.
Fails to reduce incurred claims ratio on the retained account.
Capacity offered is limited.
14
How does a QS treaty Work?
Risk SI
100,000
Premium Ceda Reinsurer
20,000 nt
Loss 25,000 Retains fully 100,000 If No Treaty
Premium 20,000
Loss 25,000
Net balance: (5,000)
15
Quota Share Treaty Cession
16
Surplus Treaty
Characteristics
Obligatory in nature.
Cession of policies, where SI exceeds the gross retention.
Hence retention on every policy, but cession may not be on
every policy (Like QS).
Placed in terms of lines (not in % like QS)
Capacity Treaty, as capacity can be stretched through number
of lines & through creation of first, second and third surplus
treaties.
17
Uses of Surplus Treaty
18
How does a Surplus Treaty Work?
19
Surplus Treaty Risks Distribution
20
QS & Surplus Treaties: Cessions
21
Distribution of Risk over QS & Surplus
Treaties
22
Distribution of Risk over QS & Surplus
Treaties
23
Risk Distribution over an RI Programme
24
Why do we require RI A/c ?
U/W and A/C are inextricably related.
They are two sides of the same coin.
Together they determine the financial
performance of the Reinsured and the
Reinsurer.
A Statement of Account (SOA) is summary of
Ceding Companies transactions of
Premiums and Claims,
For a Class of business,
25
Why do we require RI A/c ?
Because:
They are the records of transactions between the
parties to an RI Contract.
Information contained in the RI A/c is required by
the Reinsurer to enable it to prepare:
A/c for its own retro-cessionaries.
Financial A/c (i.e. Profit & Loss, Balance Sheet) and to
26
Premium Bordereaux
Purpose:
To record each cession of premium to the
reinsurance treaties so that:
premiums can be allocated easily to reinsurance;
there is a convenient list of cessions that can be
used as the basis for allocating claims;
statistics may be compiled easily;
27
Premium Bordereaux
28
Premium Bordereaux
Cession number: so that each cession to reinsurance can
be identified a sequential number is allocated.
Policy number.
Name of insured.
Effective date: date of commencement of policy, renewal
date or date of endorsement, alteration, etc.
Expiry date: date of termination, etc. of policy.
Type: type of premium (e.g., 1 - renewal; 2 - new; 3 -
endorsement; 4 - cancellation; etc.)
Building: use of building, e.g., dwelling, farm, office, etc.
Sums insured and premiums
29
Claims Bordereaux
Purpose
To record each claim to be recovered
from the reinsurance treaties so that:
claims can be recovered correctly from
reinsurers;
statistics may be compiled easily;
reinsurers are aware of the losses they are
being asked to pay and can establish
adequate reserves.
30
Claims Bordereaux
31
Claims Bordereaux
Policy number.
Cession number: so that each cession to reinsurance can
be identified a sequential number is allocated.
Name of insured.
Claim number.
Date of loss: so that the loss can be allocated to the
correct years reinsurers.
Type of loss: theft, fire, etc.
Payment: to identify multiple part payments of a loss. The
column should be completed with first, second, etc.,
and, when a final payment is made final should be
entered so that reinsurers will know that they can close
their file on the loss.
32
Claims Bordereaux
33
Loss Notification
SHOULD BE ON COMPANY LETTER-HEAD, MENTION DATE, TREATY NAME & U/W YR
It is/is not expected that a cash loss settlement will be requested in respect of this claim.
We will keep you informed of all developments regarding this claim.
34
Cash Loss (CL)
To enable immediate recovery of very large
losses.
If CL Limit is 1,000,000, a loss recovery of
more than 1,000,000 becomes eligible for
immediate Cash Call.
CL settlement by Reinsurer is kept in
suspense A/c which is squared off when that
particular loss is included Paid Claims of
statement of account & CL Credit is given to
reinsurers who have paid the claim.
35
Submission of SOA
At regular intervals, a:
treaty account
will be dispatched to all reinsurers. The
account will contain technical and financial
items and forms a statement of amounts
due to or from the reinsurer.
36
SOA will usually have following
debit and credit items
37
Company Letter Head
U/W Year 2009
Quarter 3rd Q
QUARTERLY
Treaty Name &STATEMENT
Quarter Period: 1.7.09 to 30.9.2009 DEBIT CREDIT
Date
PREMIUMS: RECEIVED - RETURNED 50,000
COMMISSION @ 30% 15,000
REINSURANCE TAX @ 5% 2,500
CLAIMS PAID LESS RECOVERIES 15,000
PREMIUM RESERVE RETAINED @ 35% 17,500
PREMIUM RESERVE RELEASED (PREV Q) 20,000
INTEREST ON PR RELEASED 200
BALANCE 20,200
TOTAL 70,200 70,200
BALANCE BROUGHT FORWARD 20,200
% Net payable
EAGLE REINSURANCE CO 10.00% 2,020
SPARROW REINSURANCE CO 15.00% 3,030
PARROT REINSURANCE CO 5.00% 1,010
TOTAL 30.00% 6,060
38
Periodicity of rendering Accounts
Accounts can be rendered on Quarterly,
Half-yearly basis.
Traditionally Quarterly system is used
and is more desirable for Reinsurers as
accounts prepared on longer duration
delay receipt of premium & also delay
submission of information.
39
Commission
40
Commission
41
Flat % Commission
This
is the simple and most commonly
used method.
The percentage of commission is defined in
the treaty slip, say 35%. This percentage is to
be applied to the gross or net premium,
accounted in that Quarter (as defined in the
terms) to arrive at the commission.
Gross Accounted Premium 1,000 X 35% = 350
commission.
42
Flat + Additional Commission
43
S/S Commission
44
S/S Commission
Provisional Commission:
Unless loss ratios are known, the actual
commission can not be determined. Hence
provisional (interim) commission payable. Usually
this is fixed mid-way between the minimum and
maximum rate.
Minimum rate is 25%
Maximum rate is 35%
Provisional Commission will be 30%. This is
considered equitable as neither party can pre-judge
the final result of the treaty.
45
S/S Commission
Calculation
of Loss Ratio will depend on
method of accounting whether
Underwriting year or Accounting Year.
For underwriting year method of accounting
it is unusual to have S/S commission e.g.
Engineering, Marine and Aviation business
because these years take many years to
fully develop.
Reward for profit are dealt with through
Profit Commission.
46
Calculation of L/R for S/S commission
run-off Treaties
Loss ratio, being calculated at various
points in development of one u/w year,
will keep on changing until all liabilities
expire. The rate of commission directly
related to loss ratio, the actual level of
commission payable to the Cedant will
fluctuate and adjustments will have to be
done accordingly. Amount of
administrative work involved in this
calculation is enormous.
47
S/S Commission Table
As per practice, the treaty terms would include a
detailed scale of commission payable related to
actual loss ratio.
To determine the actual rate of commission
payable all that is necessary is to select the
appropriate rate from the scale.
Example: Loss Ratio 52.8% Commission 28.50%
Loss Ratio 66.60% Commission 21.50%
Loss Ratio 78.20% Commission 15.50%
48
S/S Commission- Min & Max Rates
The S/S commission will have a min rate and a
max rate.
The min rate reflects the least amount of
commission that the Cedant requires to take care
of its acquisition costs.
The max rate reflects the highest amount of
commission the Reinsurer is willing to give.
S/S commission itself includes the rewards for
profitability, hence it is not usual to encounter the
S/S commission and the PC in the same treaty,
although it may happen in practice.
49
Calculation of L/R for S/S commission
Incurred Loss Losses Paid during the year + O/S at the end of the
year
+ Reserve for O/S loss at the end. (LR)
- Return Reserve for O/S Loss from the previous year.
(RLR)
51
Calculation of L/R for S/S commission
Clean-cut Treaties
Portfolio Premium and Losses apply at the beginning and at the
end of the year, regardless of Reinsurers share is new, increase,
reduced or cancelled. Formula as follows:
54
Profit Commission (PC)
56
Profit Commission (PC)
57
Profit Commission (PC)
59
Profit Commission (PC)
Any Premium & Loss recoveries under
reinsurances which inure to the benefit of
the Agreement are to be taken into account.
Any excess of Income over the Outgo, will
be considered as profit.
Reinsured shall render the PC statement to
the Reinsurer for each annual period,
according to the PC formula.
60
Profit Commission (PC)
Formula: PC 10%, deficit c/f to 3 years, ME 7.5%
(but results shown below are net of the ME)
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
U/W 1 (5,000) (5,000) 1st (2,500) 2nd (2,500) 3rd
Yr Yr Yr
U/W 2 2,500
U/W 3 (1,200) (1,200) 1st (700) 2nd
Yr Yr
U/W 4 3,000
U/W 5 3,000
Result (5,000) (2,500) (3,700) (700) 2,300
10% PC Nil Nil Nil Nil 230
61
PC calculation for Engineering Treaty
Underwriting Year 1.1.2002 to 31.12.2002
As at 31.12.02 As at As at As at As at As at 31.12.06
31.12.02 31.12.03 31.12.04 31.12.05
INCOME
Premium 1,500,000 2,000,00 2,500,00 3,000,00 3,500,000
0 0 0
TOTAL INCOME 1,500,000 2,000,00 2,500,00 3,000,00 3,500,000
0 0 0
OUTGO
Commission at 25% 375,000 500,000 625,000 750,000 875,000
Claims Paid 500 1,000 1,000,00 1,500,00 2,000,000
0 0
Tax on Premium @ 5% 75,000 100,000 125,000 150,000 175,000
ME @ 5% 75,000 100,000 125,000 150,000 175,000
O/S loss at the end of yr 10,000 50,000 500,000 300,000 100,000
TOTAL OUT GO 535,500 751,000 2,250,00 2,850,00 3,325,000
0 0
Profit / (Loss) 964,500 1,249,00 250,000 150,000 175,000
0
PC at 20% 192,900 249,800 50,000 30,000 35,000 62
Less PC as last year 192,900 249,800 50,000 30,000
Super Profit Commission
Additional PC Net Profit :60,000
payable over and 15% PC :
above the normal 9,000
PC. Net Result :51,000
e.g. if the PC is 15%
30% Super PC :15,300
and Super PC is
30% the working will Total PC payable:24,300
be done as
indicated:-
63
Outstanding Losses
64
Outstanding Losses
65
Proportional Treaty Accounts
66
U/W & A/C - at a glance
Accounting Year
U/W 2002 2003 2004 2005 Total
Yrs
2002 100 50 (120) 15 45
2003 X 80 45 5 130
2004 X X (55) 45 (10)
2005 X X X 60 60
Total 100 130 (130) 125 225
Result of each U/W year will be finalized when liability for that
year is expired.
Result of each A/C year may include items for more than one
U/W year
67
U/W & A/C - at a glance
1999
2000
2001
Total
A/c Yr
68
U/W Year Method (run off)
Suitable for classes where
Policies issued for more than 12 months
(CAR/EAR), premiums are collected over more
than one A/c year & exposure to the losses also
extends for same period.
Marine, Aviation, Liability, CAR, EAR etc. medium
to long tail business
Delays in settlement of account due to
Legal judgment / medical consideration
Repairs to be carried out
69
U/W Year Method (run off)
70
U/WA/cYear
Yr 02
Method (run off)
A/c Yr 03 A/c Yr 04 A/c Yr 05
Four
FourQtly
Qtly
Four
FourQtly
QtlyA/c
A/c Four
FourQtly
Qtly Four
FourQtly
Qtly
Run
Run offA/c
off A/c Run
Run offA/c
off A/c Run
Run offA/c
off A/c
Reinsurers Continue
U/W 2002 PC
PCCalculation
Calculation Revised
RevisedPC
PC Revised
RevisedPC
PC Revised
RevisedPC
PC
O/L
O/LAdvice
Advice Revised
RevisedO/L
O/L Revised
RevisedO/L
O/L Revised
RevisedO/L
O/L
Four
FourQtly
QtlyA/c
A/c Four
FourQtly
Qtly Four
FourQtly
Qtly
Run
Run offA/c
off A/c Run
Run offA/c
off A/c
Reinsurers Continue
PC
PCCalculation
Calculation Revised
RevisedPC
PC Revised
RevisedPC
PC
U/W 2003
Revised
RevisedO/L
O/L Revised
RevisedO/L
O/L
O/L
O/LAdvice
Advice
Four
FourQtly
Qtly
Four
FourQtly
QtlyA/c
A/c Run
Run offA/c
off A/c
Reinsurers
U/W 2004 PC
PCCalculation
Calculation Revised
RevisedPC
PC
Continue
O/L Revised
RevisedO/L
O/LAdvice
Advice O/L
6 12 18 24 71
U/W Year Method (run off)
J F MA MJ J A S O N D J F MA MJ J A S O N D J F MA MJ J A S O N D
J
F
M
A
M
J
J Policy Incepts
A
S
O
N
D
72
SOA for Run Off Treaty
73
Why Clean Cut A/c System?
Administrative costs for handling accounts are very
high.
Large treaties are placed with a number of
reinsurers, hence more administration.
Reinsurers may change their shares or cancel
participation, hence Cedant may be required to
allocate Premium, Deductions, Claims & other
accounting items to many different reinsurers, until
the liability is finally expired.
The concept of Portfolios was introduced to assist
both Ceding Company and the Reinsurer in
reduction of administrative expenses.
74
Portfolios
75
Portfolios
77
Portfolios
the year
78
A/c Year Method (Clean Cut)
Brings into one revenue year all Premiums
(less commissions and deductions) less
claims payable, reported by the Cedant
during that revenue year regardless the
underwriting year to which the item relates.
Best suited for short tail class of business
such as Fire & Accident where both
Premiums and Claims are settled faster.
79
A/c Year Method (Clean Cut)
At the end of the year, the liability of Reinsurers is CUT by
P/F premium & loss withdrawal and at the beginning of
the nest year, the same liability is passed on to the
U/W Reinsurers of next year, by P/F premium and loss entry.
2002 A B C D
2003 B C E F
2004 C E F G
2005 C E G
2006 E G 80
A/c Year Method (Clean Cut)
2002 2003
J F M A M J J A S O N D J F M A M J J A S O N D
J
F
M
A
M
J
J
A
S
O
N
D
81
A/c Year Method (Clean Cut) format:
Credit Debit
Premium Ceded Commission
Portfolio Premium Overriding
Entry Commission
Portfolio Loss entry Claims Paid
Loss Reserve
withdrawal
Loss P/F withdrawal
Release
PR Retained
Interest (Less Tax) on
LR Retained
Reserve Release
Credit for Cash Loss Taxes and Charged
P/F
P/FPremium
Premium
Withdrawn
Withdrawn
1.1.2000 31.12.2000
P/F Earned
Reinsurer C P/FPremium
Premium Earned
Premium
Unearned
Unearned
incoming Assumed Premium Premium
Assumed Premium
83
Portfolio Losses
This means, at the end of the treaty year, the outstanding losses are
withdrawn by the Ceding Company and credit is given to the
incoming reinsurers.
1.1.1998 31.12.1998
Outstanding
Paid Losses
Reinsurer A Losses
outgoing
P/F Loss
Withdrawn
1.1.1999 31.12.1999
P/F Loss
Withdrawn
1.1.2000 31.12.2000
J F MA MJ J A S O N D J F MA MJ J A S O N D J F MA MJ J A S O N D
J
F
M
A
M
J
J Policy Incepts
A
S
O
N
D
85
SOA for Clean Cut Treaty
86
Loss Participation Clause
Reinsured shall reimburse to the Reinsurer 40% of the loss ratio
exceeding 75% up to 100%.
Loss Ratio = % of Incurred Claims to Earned Premium.
Example 1
87
Commutation
88
Commutation
90
Premium Reserves
92
Loss Reserves
This is the consideration for
Outstanding Loss liability and include
Outstanding Losses + IBNR.
LR are usually 90% or 100% of
Outstanding Loss + IBNR.
They are retained and released
quarterly or annually as per the
provisions of the treaty terms.
93
Example of PR & LR
Retained & Released (1)
Based on 40% PR & 100% LR & 4% Interest
Year 1 Debit Credit
st
1 Qtr Premium 100,000
PR retained 40,000
nd
2 Qtr Premium 120,000
PR retained 48,000
rd
3 Qtr Premium 90,000
PR retained 36,000
th
4 Qtr Premium 60,000
PR retained 24,000
LR retained 23,000
94
Example of PR & LR Retained & Released (2)
Based on 40% PR & 100% LR & 4% Interest
Year 2 Debit Credit
th
5 Qtr Premium 50,000
PR retained 20,000
PR released 40,000
Interest 1,600
th
6 Qtr Premium 10,000
PR retained 4,000
PR released 48,000
Interest 1,920
th
7 Qtr Premium Refund 1,000
PR retained 400
PR released 36,000
Interest 1,440
th
8 Qtr Premium 200
PR retained 80
PR released 24,000
LR released 23,000
Interest 1,880
LR retained 12,000
95
Various Reserves
Strengthen Solvency of an Insurer
A = Paid Up Capital
B = Free Reserves
C = Premium Reserves
A D = Loss Reserves
E = Cat or Disaster Reserves
B
C
D
E
96
Unearned Premium Reserve
97
Methods of unearned Premium
Prorata Premium for EVERY POLICY
To be calculated by determining the
proportion of each policy that extends
beyond the treaty year.
For example: Policy Premium is 25,000 &
period is 2nd May to 1st May
Unearned Period 1st Jan to 2nd May i.e. 121
days
121/365 X 25,000 = 8287.67
98
Methods of unearned Premium
1/24th System.
Based on following assumptions:
Average policy ceded in any monthly period incepts in
the middle of each month.
Average policy period is 12 months.
99
1/24th Method
J FMAM J J A S OND J FMAM J J A S OND Relatively accurate.
1/24th Ideally suited, where
3/24th spread of policies
5/24th ceded is unbalanced.
7/24th
9/24th
11/24th
13/24th
15/24th
17/24th
19/24th
21/24th
23/24th
100
Methods of unearned Premium
1/8thSystem, is similar to 1/24th System. Only
the Assumptions are different:
Average policy incepts in the middle of each
quarterly period and expires in the middle of each
quarterly period of the next year.
Therefore for the 1st quarter, quarter of premium
remains unearned at the end of the treaty year i.e.
1/8th; for the 2nd Quarter 1 quarter of premium
remains unearned i.e. 3/8th.
This method is also reasonably accurate & simple
to calculate.
Depends on average policy period of 12 months.
101
1/8th Method
Treaty Year 1 Treaty Year 2
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1/8th
3/8th
5/8th
7/8th
102
Methods of unearned Premium
Flatpercentage basis i.e 35% to 40%
system
Least accurate of all systems.
35% to 40% of annual premium is
withdrawn.
Unless policies are well balanced, this
system will work against the interests of
either party.
Most commonly used method, as simple
and easy to operate.
103
Chain of Proportional Treaty A/c
104
105