NON-PROPORTIONAL REINSURANCE
Overview
NON-PROPORTIONAL REINSURANCE
Unlike proportional reinsurance, which is based on original liability and
proportional cession, 'with non-proportional reinsurance it is the amount of
loss and the cover, which is limited in amount, which are to the fore. We
therefore also talk of "excess of loss reinsurance". The essential subjects of
the contract are:
Protects only the net retention of an insurer after compulsory cession,
proportional treaty and facultative arrangements, if any i.e. exposures
the insurer keeps
A fixed limit: the priority - up to the amount of which insurers bear all
lossesfor their own account;
A limit of cover: the so-called "layer" - up to the amount of which the
reinsurer pays portions of claims above the deductible
The reinsurer is liable only for losses in excess of an agreed amount and up to
a limit. The amount over which the reinsurer is liable is the priority. This is also
described as the ®-.[Link],lcJLt.21e,
the [Link], th~ f§tention,tFielOss retention,
or as the attachment point. The cimount up to which the reinsurer is liable is
the layer limit or the cover. Sometimes it is described as the security.
Example:
The example shows the typical basis of an XL. The reinsurer will pay up to
$2,000,000 if any loss exceeds $100,000.
EXCESS OF LOSS
Reinsurer to pay $2,000,000 in excess of $100,000
Thisis expressed in short as: $2,000,000 xs $100,000
$100,000 is the 'priority' / 'deductible' / 'underlying'
/ '(loss) retention' / 'attachment point'
$2,000,000 is the 'limit' / 'cover' / 'security'
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NON-PROPORTIONAL REINSURANCE
Overview
Non-proportional reinsurance can be structured in several layers. Note that
the sum total of the priority and the capacity of a Layer is the priority of the
next layer. Thisis to ensure to_aJJb.ereis no gap in cover for the reinsured and
is called the concept of ~ Also note that the capacity of a higher
layer is usually larger than the lower. The chance of losses at higher layers is
lower and some reinsurers are willing\,to assume higher exposures.
-":1 (t
\. Capacity from the ground-up
0,000,000
Third Layer
$1,000,000
$3,000,000
$5,500,000 xs
xs
$500,000 $500,000
$1,500,000
$4,500,000
FirstLayer
Priority
Second Layer 4,500,000
1,500,000
500,000
Non-proportional reinsurance offers insurers another way of cutting probable
claim peaks back to the level of retention they find acceptable. The fact
that the [Link] of claims and the distribution of liabilities in an insurance
portfolio differ is of relevance here. The occurrence and amount of a loss are
fortuitous, with varying degrees of probability. As far as the period of time is
concerned, basically only the losses occurring during the agreed period of
the contract are covered. In reinsurance jargon one therefore talks of "years
of occurrence". Unlike proportional reinsurance, non-proportional
reinsurance cover is separate from the original portfolio and therefore from
the terms of the original policies and from the original premiums.
With proportional reinsurance the reinsurers have no influence over the
original premiums charged nor over the reinsurance premiums ceded.
They can only exert some degree of control by the level of commission
which they are prepared to allow to the reinsured.
Thus if the reinsurers feel that:
• there is too much competition in a market driving down the direct
premiums,
• that direct commissions are too high, or
• that results have not been good enough
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NON-PROPORTIONAL REINSURANCE
Overview
... they may only be prepared to grant proportional reinsurance cover at a
level of commission which is less than the acquisition costs of the direct
companies.
With excess of loss reinsurance the situation is totally different. Here, the
reinsurers will quote the price at which they will be willing to give reinsurance
protection. It then becomes the decision of the reinsured whether it wishes
to accept the quotation or not.
As the reinsurer does not participate in losses which are below the priority, his
consideration is not in the form of proportionate shares of primary premiums.
In fact, he sets the premium of the cover either as an amount or a rate to be
applied to the premium of the protected portfolio, to reflect the loss
expectancy transferred.
Non-proportional reinsurance can take the form of:
• Facultative XOL placements for single risks;
• Per risk (or anyone risk) XOL treaty protecting a portfolio of policies
against large single losses;
• Catastrophe XOL treaty for a loss event affecting many policies with a
loss normally greater than the insurers retained exposure of two
individual policies;
• Stop Loss/ Aggregate XOL to protect against random fluctuations in
loss ratios during a financial year.
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NON-PROPORTIONAL REINSURANCE
Overview
COMPARISON OF PROPORTIONAL AND NON-PROPORTIONAL REINSURANCE
PROPORTIONAL NON-PROPORTIONAL
• Sums Insured are shared • Sums Insured are not shared
• Pro-rata share of original • The reinsurer does not get pro-
premiums on risks ceded is rata share of original premiums;
ceded to the reinsurer a premium or a rate is set which
is applied to the premium of the
protected portfolio to establish
the consideration of the
reinsurer
• Reinsurer pays Commission and • No compensation by way of
Profit Commission on business Commissions. No relief in the
ceded as compensation for expense ratio
expenses incurred by the
cedant in procuring the
business. This also helps in
lowering the expense ratio
• No limit on number of losses • An event or occurrence limit
covered (unless cession or usually applies, hence limited
event limits in place). Reinsurer cover. There is also an
is committed on all policies. aggregate limit through the
Hence useful for a portfolio operation of reinstatement
with high frequency of losses provisions
• Amounts payable and • Up-front payment of minimum/
receivable settled through deposit premium. Less helpful in
periodic accounts (usually cash-flow. At the same time,
quarterly). Generally, helps the immediate receipt of reinsurer's
cedant in cash-flow share of losses
• Considerable administrative • Minimal administrative work
work involved to make involved
cessions, and to work out the
reinsurer's share of losses
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NON-PROPORTIONAL REINSURANCE
Overview
• Substantial part of the original • Allows retention of a large
premium is ceded share of the original premium
• Helps in Solvency Margin, since • Limited help in Solvency
Net Premium is substantially Margin, since little impact on
reduced Net Premium
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NON-PROPORTIONAL REINSURANCE
Overview
COMPARISON OF PROPORTIONAL AND NON~PROPORTIONAL TREATIES
PROPORTIONAL NON-PROPORTIONAL
• Retention proportionate • Priority/ Deductible - first loss
exposure exposure
• Treaty Limit - proportionate • Layer Limit - first loss exposure,
exposure, can be exceeded limit is an absolute maximum
by surveyor/ adjusters fees in and cannot be exceeded
the event of a loss
• Basisof Cover - RisksAttaching • Basisof Cover - Most commonly
During (RAD) apart from on Losses Occurring During
treaties on a clean-cut basis (LOO). Also possible on Risks
Attaching During (RAD) and
Claims Made basis
• Period - continuous contract • Period - fixed duration
subject to 3-months notice of contracts
cancellation
• Cession - the act of putting risks • Protection - no ceSSions,
into treaty protects the net retained
portfolio
• Gross Loss,Treaty Loss • Gross Loss, fgu loss (from
ground-up; 100% of loss
attributable to net account
before application of priority),
layer loss
• Claims collected through • Each and every claim
periodic accounts (except collected individually
cash calls)
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NON-PROPORTIONAL REINSURANCE
Overview
• Treaty year-end adjustments - • Layer year-end adjustments -
profit commission, sliding scale premium adjustments (including
commission, loss participation yearly Burning Cost
clauses, portfolio withdrawal adjustment), readjustment of
and entry accounts under reinstatement premiums
clean-cut treaties
• Brokerage - 2.5% max • Brokerage - 10%max
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