Slide for reinsurance module

1. 1. Flat premium basis
• The ceding company and reinsurer agree
to a premium that should be adequate to
cover the reinsurer’s liability and costs,
this being paid at commencement and
subsequent renewal dates. The premium
may be paid by installment, if the treaty
so provides.

2. 2. Percentage basis
• The ceding company and reinsurer agree
to apply a percentage to the annual gross
premium income or net premium income
of the business covered by the treaty.
• Gross or net premium income may be
determined on a written or earned basis,
depending on the terms of the treaty.

3. Percentage basis
• Thus, the premium due to the reinsurer can
be calculated only when the gross or net
premium income is known, and this would
usually be at the end of the year. However,
the reinsurer is liable for losses from the
commencement date of the treaty. As it
would be unfair on the reinsurer to wait
until the end of the year for any premium,
both parties agree to the payment of a
deposit premium to the reinsurer, either at
inception date or in installments.

4. Percentage basis
• When the actual premium due to the
reinsurer is known, an appropriate
adjustment is made to the deposit
premium.
• Some treaties provide for a minimum
premium so that if the adjusted premium
is less than the minimum, no refund is
made.

5. Two methods are used for the
calculation of adjustment
premium under the treaty:
• 1. Flat rate - this is a fixed percentage.
• 2. Variable rate - this is based on the
“burning cost” of the results of the treaty
and is subject to a minimum and
maximum rate.

6. The basic formula used to
determine the burning cost is:
• (Losses paid + outstanding) ÷ (Gross or net
premium income) × Loading = Rate
• The calculation is adjusted each year until
all losses have been settled. Should the rate
calculated fall below the minimum, the
minimum rate applies. Similarly, should the
rate calculated be above the maximum, the
maximum rate will apply.

7. Burning Ratio
In primary insurance, the ratio of losses suffered to the
amount of insurance in effect. Thus, not a "loss ratio,"
which is the ratio of losses incurred to premiums
earned.

8. BURNING COST
• The ratio of actual past reinsured losses to a
ceding company's subject matter premium
(written or earned) for the same period. Used
to analyze past reinsurance experience or to
project the future.