RI Accounting as long as Non Proportional Treaties Accounting as long as Non Proportional What is Non Proportional RI Why is it called Excess of Loss Why is it called Excess of Loss
Burns, Mary, Executive Vice President has reference to this Academic Journal, PHwiki organized this Journal RI Accounting as long as Non Proportional Treaties Mrs. A. U. Nayak Director J. B. Boda & Co (S) PTE LTD Singapore Accounting as long as Non Proportional Under the XL treaties there are various types of Premiums. But the accounting as long as XL treaties is simple as there are No commissions (generally no PC also) No reserves. No portfolios Premiums are accounted separately. Losses are recovered on individual basis (assuming a Catastrophe loss is a single loss). What is Non Proportional RI Non Proportional RI is basically a method of reinsurance through which the reinsured obtains protection as long as his portfolio. There is no pre-decided fixed proportion in which the reinsurer in addition to reinsured share the premiums in addition to losses of a portfolio. Hence this is called Non Proportional. These methods are also called Excess of Loss Reinsurance.
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Why is it called Excess of Loss For a recovery under this method of reinsurance: The loss amount must exceed a fixed threshold known as deductible or priority or underlying as long as qualifying recovery from Reinsurers. Reinsurers liability is also fixed, known as the Cover Limit. Why is it called Excess of Loss 400,000 600,000 Retention Recovery 1st loss 2nd loss 3rd loss Advantage & Disadvantages of XOL RI Advantages: Simple, easy in addition to inexpensive administration. Efficient in addition to clear protection. Disadvantages: Premium cost may vary from year to year. The Sum of retentions as long as a per risk cover can be relatively high if the frequency of risk losses is large Risk might run out of cover if unexpected frequency exhaust the automatic reinstatements. Further reinstatements might be at high costs (back-up layers)
What are the main types Risk XOL: which protects the reinsured from large single risk losses, used as long as any traditional classes of business where a single risk can be defined. Catastrophe XOL: which protects the reinsured from accumulation of losses out of a single event, used as long as protection against traditional classes in addition to particularly as long as Nat-Cat perils. Stop Loss XL: which protects the reinsured from accumulation of losses over a certain period, usually one year (e.g. Crop Insurance). Also known as Aggregate Loss Ratio XL. Risk Excess of Loss Cover Generally the claims profile of an insurer shows most of the losses are small in size & few claims are large. Insurer has capacity to pay small claims but needs help to pay large claims. Hence he chooses to pay all losses up to a level he is com as long as table with in addition to beyond that threshold asks the reinsurer to pay. Catastrophe Excess of Loss Excess of loss cover protection as long as accumulation of loss out of a single event. Proportional Reinsurance in addition to Risk XL control the vertical exposure on individual risks. However the Cat XL protects an insurer from horizontal exposure, when a single loss affects a number of policies in addition to risks. Natural events such as a flood, cyclone, earth-quake, volcanic eruption, or, or man made event such as riots / large fires in conflagration areas can cause wide-spread loss.
How does it work For example: If the cover is 800,000 excess of 200,000. Which means the loss must exceed 200,000 to qualify as long as a recovery from the reinsurer . But at the same time, the Reinsurers liability is limited to 800,000. All losses up to 200,000 each are retained net. If there is a loss of 1,250,000: Reinsured retains 200,000 Recovery from Reinsurer: 800,000 Balance 250,000 falls back to reinsureds retention because the cover was inadequate. How does it work The above example means: Reinsured has to keep certain amount of loss retention on every loss. Reinsurer is NOT liable to pay every loss. There is a limit to how much loss the Reinsurer will pay. Since every risk is not shared in proportion, the Reinsurer is not entitled as long as proportional premiums. How does it work
Premiums in Non Proportional GNPI = Written Premium less Return Premium, Cancellations in addition to premium on reinsurances which reduce the exposure of the XL Reinsurers. XL Premium= GNPI x Rate of Adjustment. M & D Premium= XL Premium x 80% or 90% as may be negotiated & agreed. Adjustment Premium= Excess of XL Premium over the M & D Premium, but not vice versa. Reinstatement Premium= Proportionate premium payable to the reinsurers, in case of a loss recovery, as per predetermined terms, which will reinstate the cover limit of the XL treaty. GNPI: Net Retained Premium XL Premium Since every loss is not shared in proportion, Reinsure is not entitled as long as proportionate premium. There can be years, when not a single loss is recovered from Reinsurers in addition to Reinsured retains all losses, as they are within the deductible level. The XL premium is there as long as e worked out on the basis of certain rating methods such as Burning Cost, Exposure, ROL methods etc. Reinsurers use rating models as long as various classes in addition to trypes of XL treaties.
A rate of adjustment is arrived at by using vaious methods of rating in addition to this rate is applied to the GNPI of the whole portfolio. The premium thus arrived is called the XL Premium. For example : GNPI is 20,000,000 Rate of adjustment is 2% XL Premium is 400,000 Now the GNPI it self is an estimation by the Reinsured. Depending on the market conditions in addition to business strategies of the Reinsured, the (estimated) GNPI : may be reached, say is accounted at 20,000,000 may not be reached, may reach to 15,000,000 or may exceed the estimate in addition to reach to 25,000,000 How is Premium fixed as long as Non Prop XL Premium GNPI X Rate of adjustment = XL Premium Minimum & Deposit Premium XL Treaty is arranged as long as period 12 months at 1.1.2000 In as long as mation given to Reinsurers be as long as e 31.12.1999. Hence the GNPI is estimated at say 2,000,000 But, the actual Accounted Premium will be known only at 31.12.2000 It might be more than 2 m or less than 2 m. Neither party knows. Reinsurer is selling his capacity, he is providing capital to reinsured to write large risks. Hence Reinsurer wants a minimum return on the capacity sold or capital provided. There as long as e a minimum in addition to deposit premium is charged which is payable in advance. In the above example, if the rate is 5% – then the XL Premium would be 100,000 The MDP would be charged say at 85% or 90% of the XL Premium.
Adjustment Premium The Reinsurers will receive MDP during the period of cover. At the end of the cover when the actual accounted GNPI is known, the final XL Premium is to be ascertained. In above case if final GNPI is 2,500,000 Then the actual XL Premium would be 125,000 (2.5 m XS 5%) The Reinsurer has already received MDP of 90,000, hence by way of Adjustment Premium he will receive the balance 35,000 Accounting as long as Non Proportional Calculation of Premiums: Terms: GNPI 20,000,000 (Period 12 months @ 1.1.2000) XL Rate: 2.5% XL Premium: 500,000 M & D @ 85%:425,000 payable quarterly in advance. 1st installment on 1st January 2000 : 106,250 2nd installment on 1st April 2000 : 106,250 3rd installment on 1st July 2000 : 106,250 4th installment on 1st Sept. 2000 : 106,250 Actual GNPI @ 31.3.2001 is 22,000,000 XL Premium = 550,000 Adjustment Premium due to Reinsurer is 125,000 BC Premium Assumption: Motor /WC/EL XL 1st layer. GNPI 2,500,000. Period 1.1.99 to 31.12.99 LOD basis. Treaty : 1,000,000 XS 500,000 Rate min 4% & max 10%. XL P 100,000 (technically there should be no MDP when the rate is Min & Max) Loading factor 100/70. BC Calculation: During the year there is one loss of 700,000. Recovery from Reinsurer is 200,000 Pure BC = 200,000 / 2,500,000 X 100 = 8% Loaded BC = 8 100/70 = 11.43% Maximum rate is 10% Hence BC adjusted Premium is 250,000. Already paid 100,000, so AP 150,000
Reinstatement Premium Cover : 500,000 xs 500,000 at cost of 50,000 Loss of 400,000 recovered from the cover. Hence the balance protection reduced to 100,000 as long as the remaining term. The Cedant would like to reinstate the cover to its original level by paying additional premium, known as the reinstatement premium. This can be @ 50% or 100% or 125% etc. of the original XL Premium or can even be free of cost e.g. in case of the Motor XL 1st layer. Reinstatement Premium MDP 50,000 200,000 Reinstate at Additional Pro-rata Premium Of 30,000 500,000 500,000 Loss of 700,000 recovers 200,000 from layer 200,000 300,000 Calculation of Reinstatement Premium 1st Reinst. @ 50% AP 2nd Reinst. @ 100% AP
Adjustment Premium Cover is 1,000,000 XS 500,000 EGNPI is 5,000,000 Rate is 2% E XL Premium 100,000 & MDP 90,000 Accounting as long as Non Proportional Policy attaching basis & Losses Occurring Basis. 1.1.2002 31.12.2002 Loss 1 Loss 2 Loss 3 Loss 4 Loss 5 Policy 1 Policy 2 Policy 3 Policy 4 Reinsurers on a Policy Attaching contract will pay No.3, 4 & 5 losses. Reinsurers on a Losses Occurring contract will pay No. 1,2, & 3 losses. U/W Yr 2002 Preliminary Loss Advise We regret to advise a loss as per following particulars: Cover Name of Insured Policy No Claim No Date of Loss Period of Insurance Sum Insured Particulars of Loss Description of Risk Covered Est. Amount of Loss Deductible Est. Amount of loss affecting layer We shall keep you in as long as med of the further development, meanwhile kindly register this claim in your books. ON COMPANY LETTER HEAD & DATE / REFERENCE TO BE MENTIONED
Loss Recovery Advice Chain of Non Proportional Accounting Settlement of MDP in advance Loss advise Revised Loss advise in addition to loss survey Recovery of Claims after discounting the reinstatement premium. Advice of Losses outst in addition to ing at the end of the year. Advice of final accounted GNPI in addition to adjustment premiums at the end of the year. This advice should sent as long as few years, until all risks are fully serviced. Some important clauses pertaining to the Non Proportional Treaties
Hours Clause Two Events, in addition to two Loss retentions Interlocking Clause (risks attaching) Purpose of this clause to allocate or apportion the liability If arising out of ONE Event or Cause But falling in the scope of TWO or MORE parallel treaties or TWO or MORE underwriting years of the same treaty. Effect of this clause is To proportionately scale down the limits of treaty to apportion in addition to allocate loss to each contract. Otherwise the Cedant has to bear full retention under each of the treaties or underwriting years affected. Interlocking Clause – Example
Burns, Mary Executive Vice President
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