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NON PROPORTIONAL
1.
2. NON-PROPORTIONAL TREATY
Non-proportional treaty is an agreement between
a reinsured and reinsurer whereby the reinsurer
agrees to pay the reinsured all losses which
exceed a certain specified limit (deductible) up to
a predetermined upper limit for losses arising out
of a portfolio of risks being protected.
Also known as excess of loss treaty as the
reinsurer is liable for losses in “excess”of the
reinsured’s deductible or retention.
For this commitment to indemnification, the
reinsurer receives a reinsurance premium
independent of the original premium.
3. NON-PROPORTIONAL TREATY
(cont…)
To summarize:
Non-proportional reinsurance treaty:
• is based on claim/loss sharing
• is only liable for claim above
certain level (deductible)
• Premium and claims are calculated
separately from the original
arrangement
4. NON-PROPORTIONAL TREATY
(cont…)
If reinsurance programme is
arranged base on both proportional
and non-proportional reinsurance
treaty, the risks are shared on
proportional treaty first.
The portion that is retained by the
insurer will then be reinsured on a
non-proportional basis.
5. Combine Proportional and Non-
proportional Treaties
RM500,000
Sum insured – RM10,000,000
Surplus 5 line
Loss RM7,000,000
RM2,500,000 RM7,000,000
Retention Surplus Facultative
Insurer will arrange the
retention based on non-
proportional treaty as
follows:
RM300,000 xs RM200,000
S/I
Loss RM350,000 RM1,750,000 RM4,900,000
Xl recovery
Gross loss retention
RM350,000
Deductible
200,000
XL Recovery
150,000
6. Types of Non-proportional Treaty
Per risk excess of loss (working
excess of loss) WXL
Per event excess of loss
(Catastrophe excess of loss) CXL or
CATXL
Excess of loss ratio (Stop loss or
aggregate excess of loss)
7. Example
RM450,000 excess of RM50,000
Reinsured retained first RM50,000 of
every loss on every risk
Reinsurer agrees to pay for every loss
exceeding RM50,000
Therefore, reinsured is able to retained
risk of sum insured up to RM500,000
knowing that the maximum claim it may
pay under any one loss arising is limited
to RM50,000
9. Operation of XL
If XL cover is inadequate due to large
amount of losses, reinsured can arranged
for more than one layer of XL or can
increase the limit of that single layer.
If reinsured retained the inadequate
cover, the retention of loss will increase
which may cause fluctuation in the u/w
result or even threaten the financial
stability or solvency of the reinsured.
10. Operation of XL
Single layer of larger XL treaty
RM2,000,000 xs RM500,000
Multiple layer of XL treaties
1st layer RM450,000 xs RM50,000
2nd layer RM1,000,000 xs RM500,000
3rd layer RM2,000,000 xs RM1,500,000
Therefore loss of Risk 4 can be distributed
as:Retention RM50,000
1st layer RM450,000
2nd layer RM250,000
11. Reason for Dividing Into Multiple
Layer
Splitting the risk excess of loss treaty
cover into layers facilitates the
placement of reinsurance cover as
there is preference or specification in
different levels of cover by different
reinsurer or reinsurance market
12. Exercise
Working XL: 1st Layer RM200,000 XS RM100,000
2nd Layer RM700,000 XS RM300,000
Gross Retn Dectb 1st Layer 2nd Layer
S/I Claim S/I Clm
500k 300k 500k 300k 100k 200k Nil
5,000k 300k 1,000k 60k 60k nil nil
1,000k 600k 1,000k 600k 100k 200K 300K
Calculate the claim recoveries under the excess of loss
treaty .
15. Uses of Non-proportional Treaty
Best way to reinsure liability classes
of business
Can increase net retained premium
and profit if:
• Business is substantially profitable
• Incidence of small claim is low
17. Disadvantages of non-proportional
treaty
Small losses fully fall on net account
Very rapid adjustment in terms
following claims experience
There is no ”transfer of risk”. It only
provides a :spread of loss” facility
18. Per Risk/ Working Excess of Loss
An agreement between reinsured and reinsurer
whereby reinsurer agrees to pay all ultimate net
losses on per risk basis which exceeds reinsured
retained loss (deductible) up to an upper limit
fixed by the reinsurer.
• Ultimate net loss is the total claim actually paid by
reinsured in settlement of losses.
• It include claim expenses, salvage, subrogation,
recoveries and treaty reinsurers inuring to the benefit of
the excess of loss cover
Total sum actually paid by the reinsured in settlement of
its liabilities=
Claim paid to policyholder
Plus: expenses litigation (if any)
Plus: all other expenses of the reinsured (excluding
office expenses and salaries of reinsured’s
employee)
Less: salvages and /or recoveries (if any)
Less: recoveries from other insurance company
19. Features of Risk Excess of Loss
1. Ultimate net loss
• Ultimate net loss is the total claim
actually paid by reinsured in
settlement of losses.
• It include claim expenses, salvage,
subrogation, recoveries and treaty
reinsurers inuring to the benefit of
the excess of loss cover
20. Features of Risk Excess of Loss
2. Per risk cover
• Covers losses on every individual
risk that exceeds the deductible
and falling on the business
covered under the treaty.
• The cover basis is “each and
every loss each and every risk”
21. Features of Risk Excess of Loss
3. “Working” or “underwriting “cover
Known as “working” because the
deductible is low that the reinsurer
is expected to be involved in paying
claims.
It is a good alternative to surplus
treaty in providing protection on
per risk basis
22. Features of Risk Excess of Loss
4. Reinsurance premium (Pricing of Risk
Excess of Loss Cover)
No proportional sharing of risk and loss therefore
no proportional sharing of original premium
Reinsurance premium rate for risk excess of loss
treaty is calculated separately from original
premium rate of reinsured.
Reinsurance premium is obtained by multiplying
this rate (R/I rate) to the reinsured’s gross net
premium income (GNPI) of the business covered
by the risk excess of loss treaty.
Calculation of reinsurance premium rate is derived
from the burning cost multiply by the loading
factor
23. Cont….
GNPI is Gross (inclusive of acquisition cost) Net
(exclude of facultative and prior including
proportional reinsurance) Premium Income
(premium income written or cashed by reinsured
with respect to policy in the reinsurance period
less only returned premium and cancelled
premiums)
The reinsurance premium must be sufficient to
meet reinsurance claim cost, acquisition and
administration costs and profit of reinsurer.
The basic method of determining Rates for risk
excess of loss treaty is “Burning Cost” method
24. Burning Cost
Burning cost: a method of calculating the
premium in non-proportional
reinsurance, in particular excess of loss
and stop loss reinsurance, whereby the
premium is directly related to the
insured's claims experience; the
reinsurer reviews the cedant's claims
experience to ascertain what proportion
of premium income would have been
"burned up" by the reinsurance claims.
25. BURNING COST
Suitable for WXL that each year produce a regular flow of
reinsurance claim which are settled fairly.
Burning cost or pure burning cost is pure reinsurance
premium representing the cost of claim to an excess of loss
treaty expressed as a percentage of original premium
income (GNPI) of the reinsured.
Burning cost = amount of XL claims recoverable
GNPI of protected portfolio
Reinsurance Prem Rate = B.C x Loading factor x 100%
Reinsurance Prem Amount = R/I Prem Rate x GNPI
26. Burning Cost
Burning cost is then loaded with a
factor to provide a margin for
reinsurer’s expenses and profit to
produce “loaded” burning cost or
reinsurance premium rate.
The loading factors may range from
100/70 or 100/80. If the premium
amount is small, reinsurers may ask for
100/70
Burning cost is computed from past
loss experience of an excess of loss
treaty.
28. Burning Cost
Burning cost is computed from past
loss experience of an excess of loss
treaty.
It may be based on:
• Fixed rate method - an average
experience of past five/three years
• Variable rate method – experience a
single year but subject to minimum and
maximum rates computed from past
experience
29. Fixed Rate Method
The premium rate derived from the pure burning
cost which was calculated from the treaty loss
experience divided by the GNPI and multiply by
the loading factor.
Or
Fixed Prem Rate = Claim recovl x Loading factor
GNPI
Premium rate used will not be changed and will be
used until the end of the treaty year.
The reinsurance premium amount for the current
year will be obtained by multiplying the premium
rate to the GNPI of the current year.
30. Fixed Rate Method
Deposit Premium
The actual/current GNPI is only known at the end of treaty
year.
But reinsurer need money to be able to pay claims during the
year. So reinsured is required to pay a DEPOSIT premium to
reinsurer at the inception of the treaty.
Deposit premium is calculated by multiplying the reinsurance
premium rate to the estimated GNPI which normally derived
from the previous year.
Or
Deposit prem = Reinsurance Prem Rate x Estimated GNPI
Previous year
At the end of the treaty year, when the actual GNPI
is known, the reinsurance premium will be adjusted
accordingly.
31. Fixed Rate Method
Minimum Premium
Minimum premium required when
using fixed rate method.
Since reinsurer expresses the XL
premium as a rate % to GNPI (which
at the time of rating is only an
estimate) the reinsurer safeguards
itself against much lower than
estimated XL premium by imposing a
minimum amount of premium.
32. Variable Rate Method
The reinsurance premium rate
computation is similar to fixed rate
EXCEPT that the rate can vary
according to claim experience and
subject to the limitation maximum
and minimum rate.
The maximum and minimum normally
set at 200% and 50% of the
reinsurance premium rate.
33. Variable Rate Method
Minimum rate % is to ensures that the
reinsurers will get the minimum amount of
premium for having provided protection
even when the XL claims are very low or
nil in any year.
Maximum rate % will limits the cost of XL
protection to the protected company so
that in a very adverse year it will get relief
from the XL cover.
(Refer to exercise on Variable Rate
Calculation)
34. Variable rate offers advantages to both
parties :
Ceding company - benefit from low
premium rate if it is successful in
improving its loss experience and still
able to limit for its reinsurance costs
Reinsurer - it will assured of the
minimum premium and be sure that
if loss experience of ceding company
deteriorates the premium rate will
increase automatically.
35. Advantages of the Burning Cost
Quotation
Given unbiased and relevant data,
relatively good prediction of the claims
experience
The direct insurer can easily understand
the calculation
The data allow the reinsurer to understand
the business philosophy and the
underwriting practice of the direct insurer.
A trend in loss experience can be built into
the premium calculation by weighting the
most recent years more heavily.
36. Possible Difficulties with Burning
Cost Quotation
A burning cost calculation comes to a
misleading result if the data are old
or incomplete or if the composition of
the portfolio has changed or will
changed
A burning cost calculation results in a
nil-premium if there simply
happened to occur no layer-claims in
the historical data
37. Combination of Proportional treaty
and Excess of loss treaty
A company has a reinsurance program
based on 10 lines surplus treaty and
excess of loss treaty to cover the retention
(net account) of RM150,000 excess of
RM50,000.
If the company accepted a risk of sum
insured RM1,000,000 and on the same
risk a loss of RM400,000, calculate how
much is the claim recovery for
proportional treaty and excess of loss
treaty.
38. The Bersatu Maju Insurance Berhad has a reinsurance
program based on 10 lines surplus treaty and has
also affected two layers of working excess of loss to
cover against any individual losses as follows:
1st layer - RM400,000 XS RM100,000
2nd layer - RM1,000,000 XS RM500,000
The company experience losses under each risk as the
following
Risks Sum Insured(RM) Losses (RM)
A 1,500,000 900,000
B 5,000,000 1,000,000
C 6,000,000 4,000,000
Calculate the total of the losses retained by the
company and the total reinsurance recoveries under
the proportional and excess of loss treaty.
39. Application or Uses of Excess of
Loss Treaty
As an alternative to proportional
reinsurance to limit reinsured’s loss
on per risk basis
As a supplementary reinsurance
protection to the reinsured with high
gross retention under a proportional
treaty
40. Advantages of WXL
Advantages:
i) Ease of administration
Only keeping track of any large
losses which exceed the deductible
ii) Primary insurer can retain more
premium income
iii) Reduction of the impact of large
claims and retain up to the
deductible
41. Disadvantages of WXL
Reinsurance premium rate are subjected to rapid
and wide fluctuations depending on claims and
GNPI
If all claims less than deductible, the primary
insurer pay premium for nothing – cost may high
No protection for frequent losses under
deductible
Reduced cash flow as deposit premium has to be
paid at the inception of treaty
No commission payable
Less continuity of relationship than proportional
treaty
42. Catastrophe Excess of Loss
Cat XL covers the reinsured’s retention
against the natural catastrophe ie
accumulations resulting from numerous
losses caused by the same event : natural
disaster (windstorm, earthquake, flood
hail etc) or large man-made loss events
(fire disaster, plane crashes, train
derailments riots etc)
This cover provides insurers with loss
reimbursement from reinsurer ,
irrespective of the number of risks or per
event XL as long as not more than the
upper limit.
43. Cont…
The maximum loss for the
reinsured’s account (deductible) will
often be limited not only to one risk
but also to one event (accumulation)
The cover can be triggered both by
an individual loss per risk or by an
aggregate loss per event.
44. Illustration of CATXL
Cover pay up to RM800,000 xs RM200,000 a.o.e
Net retention RM1,000,000
One event affect the following risks:
Risk S/I Amount of Loss(RM)
A 500,000 200,000
B 2,000,000 200,000
C 20,000,000 600,000
Calculation of CATXL recovery:
Risk Net Retention
S/I Loss Amt
A 500,000 200,000
B 1,000,000 100,000
C 1,000,000 30,000
Total net loss 330,000
XL Loss retention 200,000
CATXL recovery 130,000
=====
45. CATXL Calculation
WXL/R RM700,000 xs RM300,000
CATXL/Event RM4,400,000 xs RM600,000
Loss No Loss Amt Share loss Share of loss
Deductible to WXL/R cover
1. 80,000 80,000 0
2. 500,000 300,000 200,000
3. 250,000 250,000 0
4. 700,000 300,000 400,000
5. 300,000 300,000 0
6. 400,000 300,000 100,000
7. 1,000,000 300,000 700,000
8. 600,000 300,000 300,000
Total 3,830,000 2,130,000 1,700,000
Aggregate loss = 3,830,000
Total recovery under WXL/R = 1,700,000
Total recovery under CATXL = 2,130,000 – 600,000
= 1,530,000
Total loss retention by reinsured = 600,000
46. Features of CATXL
It protects the reinsured’s net account in respect
of accumulation of claims in any one event or
occurrence as defined in the contract e.g
hurricane, flood, earthquake etc
Reinsurer’s pays ultimate net losses exceeds the
reinsured’s loss limit for one event.
The cover basis is each and every loss occurrence
(per event)
It intended to cover the catastrophe risks which
the treaty usually subject to ‘Two Risks
Warranty’ that is to avoid against cover per
event in which only one risk involved.
47. Definition of Catastrophe
A clear definition of occurrence or event is
important to determine how many
losses/claims may be aggregate for the
purpose of affecting a reinsurance
What is catastrophe?
• Define as some specific, enexpected,
sudden, shocking and external
happening.
• It can be located in time and place and
is the proximate cause of each and
every loss
• The catastrophe must be peril that
covered by the treaty
48. Definition of Catastrophe
Cont…
Catastrophe covers involving natural
peril exposures almost invariably
include “Hour Clause”
“Hour Clause” which limit the
deemed duration of any one event to
a pre-agreed maximum period of so
many days or hours or geographical
areas of loss.
49. Hour Clause
“Hour clause” imposes time and/or
geographical on catastrophe event or
occurrence.
Example of ‘Hour Clause” refer to page 68
This clause applies to elemental perils such as
flood, windstorm, earthquake etc and also riot
and strike.
It enables aggregation of losses occurring
within a period of 72 consecutive hours as “one
event”
The ceding company has the ability to select
the starting point or the first period of 72
hours.
One event for flood losses sometimes extends
over 168 hours.
50. Example of Hour Clause Application
Consider the following losses by windstorm covered 72
hours clause on a cover with loss retention of RM2,000,000
Date Time Loss Amt
(RM’000)
Alt A Alt B
7.1.2005
7.1.2005
7.1.2005
8.1.2005
8.1.2005
8.1.2005
9.1.2005
10.1.2005
10.1.2005
11.1.2005
11.1.2005
6.00 a.m
10.00 a.m
9.00 a.m
9.00 a.m
12.00 noon
8.00 p.m
8.00 p.m
11.00 a.m
5.00 p.m
7.00.a.m
1.00 p.m
50
50
50
1,000
500
2,000
1,500
1,500
2,500
500
300
5,150,000
1st event
4,800,000
2nd event
9,500,000
One event
CATXL recovery 5,950,000 7,500,000
51. The reinsured has protected portfolio with WXL/R RM700,000 xs
RM300,000 per risk and CATXL of RM4,400,000 per event xs
RM600,000 per event
Calculate how much is the claim recoveries under WXL and CATXL
Claim recoveries under WXL = 1,700,000
under CATXL = 2,130,000 – 600,000
= 1,530,000
Loss No Loss Amt Loss
Retention
WXL
Recoveries
1
2
3
4
5
6
7
8
80,000
500,000
250,000
700,000
300,000
400,000
1,000,000
600,000
TOTAL
80,000
300,000
250,000
300,000
300,000
300,000
300,000
300,000
2,130,000
-
200,000
-
400,000
-
100,000
700,000
300,000
1,700,000
52. Exercise 2
Consider the following losses by hurricane covered 72 hours clause on a cover with loss
retention RM1,000,000
Date Time Loss Amt
22.8.06 5.00 p.m 100,000 i)
22.8.06 8.00 p.m 200,000
22.8.06 11.00 p.m 50,000
23.8.06 3.00 a.m 80,000
23.8.06 8.00 a.m 130,000 ii)
23.8.06 3.00 p.m 20,000
24.8.06 6.00 a.m 500,000 1st event =
24.8.06 2.00 p.m 300,000
24.8.06 4.00 p.m 450,000
24.8.06 6.00 p.m 280,000
24.8.06 8.00.p.m 340,000
25.8.06 12.05a.m 120,000
25.8.06 8.00 a.m 400,000
26.8.06 6.00 a.m 310,000
26.8.06 2.00 p.m 60,000
26.8.06 5.00 p.m 55,000
26.8.06 11.00 p.m 600,000
TOTAL 3,995,000
Calculate the recovery if ceding company choose to start the first hour on:
i) 22.8.06 at 5 p.m.
ii) 23.8.06 at 8 a.m
