Advanced Accounting RE.

1 – INTRODUCTION
The main sections of this on-line course are as follows:
 More complex non-proportional accounting.
Learning objective: Be familiar with the more complex accounting types in non-proportional slips and
treaties. non-proportional treaties with burning cost premium calculations subject to minimum and maximum
rates, including reinstatement calculations. stop loss treaties with loss participation. Top and drop excess of
loss covers. Commutation. Run-off aggregate covers.
 More complex proportional accounting.
Learning objective: Be familiar with the more complex accounting types in proportional slips and treaties.
Sliding scale commissions. Profit commissions with losses to extinction. Claim participation and loss corridors.
 More complex non-traditional accounting.

Learning objective: Be familiar with the more complex accounting types in non-traditional accounting. Financial
quota shares. Collateral and collateral accounts, experience accounts.
05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING
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1 – INTRODUCTION
The main sections of this on-line course are as follows:
 More complex accounting

Learning objective: Be familiar with the more complex calculations of premium reserves and portfolios.
 The distribution of risks and losses through reinsurance programmes

Learning objective: Be familiar with the more complex distribution of risks and losses
through reinsurance programmes comprising both proportional and non-proportional treaties and facultative
cessions.
 Preparation of as-if statistics

Learning objective: Be familiar with the preparation of as-if statistics.
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2 - MORE COMPLEX NON-PROPORTIONAL ACCOUNTING
Burning cost premium calculations

A ceding company may have an area where it requires non-proportional reinsurance where losses are highly
likely to occur and the number of losses may vary considerably from year to year.
It might also be the case that the ceding company is optimistic that only a small number of losses may occur, while
the reinsurer feels there could be a number of losses.
One way to solve this issue is to have a non-proportional treaty where the premium is based on the burning cost of
the treaty, subject to a loading for the reinsurer ’s cost and profit, and subject to a minimum and maximum rate.
The wording of such a condition in the reinsurance Slip can read as follows:
Premium: minimum and deposit premium $2,500,000, rate at burning cost plus loading factor 100/75 and subject
to a minimum rate of 3% and a maximum rate of 10% adjustable on the reinsured ’s gross net written
premium income (GNWPI). Burning cost to be understood as the mathematical result obtained by dividing losses
incurred over the period by the premiums earned over the same period.
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Burning cost premium calculations – continued
i. Preparation of minimum and deposit premium account with example.
As seen in course 4, the preparation of the minimum and deposit premium account could be as follows:
During treaty negotiations, the reinsurer was informed that the estimated premium income was $52,000,000. The
underwriter expected to see losses under the treaty, so a mid rate of 6% was chosen to calculate the estimated
premium to the cover. This was thus $3,120,000, and 80% was rounded to $2,500,000.
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ii. Preparation of premium adjustment account with example.
Once the final accounts of the ceding company had been prepared, the following figures were sent to the accounts
department:
Earned premium = $ 57,345,860. The earned premium would be the earned premium of the motor portfolio which
was the subject matter of the treaty.
incurred losses = $ 3,784,827. The incurred losses would be the losses incurred under the treaty.
Mrs. Katu was responsible for preparing the adjustment account, and she went through the following process:
1. Calculation of burning cost: Incurred losses/Earned premium = 6.6%
2. Application of loading factor: 6.6% x 100/75 = 8.8%
3. Calculation of premium payable under treaty: Loaded rate (8.8%) x Earned Premium = $5.046.436
4. Calculation of premium adjustment payable: Premium payable less M&D premium = $2,546,436
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Mrs. Katu thus prepares the following account for the reinsurer

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iii. Calculation of reinstatement premiums under burning cost covers with example.
If, using the above example, the treaty was also subject to reinstatement, the process would work as follows:
The above treaty is subject to 1 reinstatement at 100%, pro rata as to time and to amount. cover is for $10,000,000
in excess of $5,000,000 and a loss occurs on 15th February 2015, which is paid shortly thereafter, being a loss to the
treaty of $ 3,784,827.
As noted above, the minimum and deposit premium is $ 2,500,000. At this stage the Reinstatement
premium will be calculated based on the minimum and deposit premium and then adjusted once the final
premium is known.
If the loss occurred on 15th February 2015, then based on a year with 365 days, there are still 319 days remaining in
the year.
Mrs. Katu thus calculates the Reinstatement premium as follows:
$2,500,000 x ($3,784,827/$10,000,000) x (319/365) = $826,959.
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She thus prepares the following account for the reinsurer
CHANGE PASSWORD LOG OUT
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iii. Calculation of reinstatement premiums under burning cost covers with example.
After calculation of the final premium due under the treaty – see the section above, Mrs. Katu needs also to adjust
the Reinstatement premium payable.
She thus firstly calculates the Reinstatement premium payable based on the final premium payable under the treaty
(i.e. $5,046,436) as follows:
$5,046,436 x ($3,784,827/$10,000,000) x (319/365) = $1,669,278
She then deducts the provisional Reinstatement premium already paid of $826,959, leaving a balance payable of
$842,319.
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Mrs. Katu then prepares the following account:

Slide 11/74 - Question
QUESTION SLIDE
Given the details below:
Which of the following statements is correct?
A. The adjustment premium is $3,606,537

B. The adjustment premium is $3,706,537
C. The adjustment premium is $2,631,302
D. The adjustment premium is $2,651,302
Select your answer
ABCD
GOOD ANSWER
Well done, good answer. What is important to note in this calculation is that the maximum rate of 8% has been
reached.
The calculation is as follows:
00:00
00:00

You can now continue the course
CONTINUE
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b. stop loss treaty
Please refer to the Slip at appendix B of your manual, which you can download at any time.
The relevant terms of the Slip are as follows:
PREMIUM :Annual minimum and deposit $228,800 payable at 1st April each year. Adjustable at 2.2% Gross Net
Earned Premium.
i. Preparation of minimum and deposit premium account with example
During treaty negotiations, the reinsurer Regent, was informed that the estimated premium income was
$13,000,000. Based on the rate of 2.2% this produced an estimated premium of $286,000, and 80% was agreed at
$228,000.
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b. stop loss treaty – continued
ii. Preparation of final account with loss participation with example
department:
Gross net earned premium income for our hail portfolio for 2015 is $14,285,346.
1. Calculation of premium due under the treaty:
GNEP x Rate = $314,278
2. Calculation of adjustment premium payable:
Premium due minus M&D = 85,478.
Mrs. Katu thus prepares the following account for the reinsurer

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c. Top and drop excess of loss treaty
Please refer to your manual for revision notes from course 2.
In the above example we are only concerned with the challenge of accounting for the top and drop element which is
layer 4.
The terms of layer 4 are:
Subject matter EPI = $15,000,000
Rate = 0.37%
M&D = $44,000
Also we are informed above that layer 4 “Subject no claims hereon, this layer will act as a 2nd reinstatement on
layer 1”.
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c. Top and drop excess of loss treaty – continued
i. Preparation of minimum and deposit premium account with example.
During treaty negotiations, the reinsurer Aspire, was informed that the estimated premium income was
$15,000,000. Based on the rate of 0.37% this produced an estimated premium of $55,000, and 80% was agreed at
$44,000.
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ii. Preparation of provisional accounts with example.
During the year 2013 there has been a large claim (claim 2 above) which is estimated at $1,000,000, thus based on
this estimate, there is a possible loss to the 4th layer of $500,000. At the same time there have been three full claims
under layer 1, thus should the estimated claim be paid at a much lower amount (thus not involving the 4th layer)
then the 4th layer is exposed to a drop down loss being the third loss under layer 1.
department:
Final subject matter premium income = $16,159,072.
Estimated outstanding loss to layer 4 = $500,000 (claim 2) or $50,000 (2nd reinstatement layer 1).
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1. Calculation of the premium due under the treaty:
GNP x rate = $59,250
2. Calculation of the adjustment premium:
Premium due minus M&D = $15,250
As there is only an estimated claim under layer 4 and the “drop down” is subject to no claims under layer 4, it is not
yet possible to request payment for the “drop down” claim.
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Mrs. Katu thus prepares the following account:
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iii. Preparation of final account with example
Just before the end of 2015, claim 2 is finally settled at $600,000. As there has thus been a claim under layer 4, it is
no longer possible for layer 4 to drop down as a reinstatement under layer 1. As there can be no more claims under
the 2013 year, Mrs. Katu is asked to prepare a final account as follows:
QUESTION SLIDE

Which of the following statements is correct ?
A. The total recovery under the 1st layer net of Reinstatement premium is $135,500
B. The total recovery under the 1st layer net of Reinstatement premium is $42,014
C. The total recovery under the 1st layer net of Reinstatement premium is $77,986
D. The total recovery under the 1st layer net of Reinstatement premium is $93,486
Select your answer
ABCD
GOOD ANSWER
Well done, good answer. What is important to note in this calculation is that there has been no claim under the 4th
layer, thus it acts as a reinstatement under the first layer. The calculation is as follows:
00:00
00:00
CONTINUE
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d. Run-off aggregate cover
A run-off aggregate cover is very similar to a stop loss treaty. The ceding company has a portfolio of business in
run-off and seeks protection should the loss ratio deteriorate faster or to a much higher level than forecast.
Just as in the stop loss hail example at appendix B, so the cover under an aggregate run-off treaty will be worded in
a very similar way:
In respect of the reinsured s closed book of professional indemnity business as described more fully herein:

To cover 30% or $10,000,000 in all excess of an amount equal to a loss ratio of 110% Gross Net Earned Premium
Income or $35,000,000 whichever is the greater.
However as it concerns a closed book of business the final GNEPI is usually known, and thus the premium for
the cover can be accurately calculated from the outset unless the rate is based on the burning cost subject to a
minimum and a maximum rate. (See above under burning cost premium calculations).
While it would be the responsibility of the claims department to keep Aspire informed of the claims position, it is
nevertheless important that it is made clear to Aspire that claims will be payable under the layer one way or the
other.
At the end of 2014 claim 2 remains an estimate, so there is no further accounting requirement.
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d. Run-off aggregate cover – continued
i. Preparation of initial account with example

It may be that premium is based on a rate of the final GNEPI, but as this is likely to be known for a closed book of
business, it may also just be a flat premium. The first account is thus likely to be the first and final account for
premium. An example would be as follows:
ii. Preparation of further accounts with example The only subsequent accounts would be those relating to claim
payment requests, if any. An example might be as follows:
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3 - MORE COMPLEX PROPORTIONAL ACCOUNTING
a. Preparation of accounts subject to a sliding scale commission
Please refer to your manual for revision notes from course 4 regarding sliding scale commissions.
In the example to be used here, the sliding scale is as follows:

This treaty is not running so well, and the parties have chosen a provisional commission rate fixed at 24%. Incoming
and outgoing portfolios are fixed at 40% for premiums and 100% of outstanding losses.
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a. Preparation of accounts subject to a sliding scale commission – continued
i. Preparation of 1st quarter account with example.
The accounts department of the Royal is advised as follows:
Premium 1st Quarter = $661,840. Claims 1st Quarter = $264,736
Mrs. Katu is responsible for preparing the accounts, and as this is an on-going treaty, she adds another column to her
spreadsheet as follows:
She calculates the commission based on the provisional rate of 24% and credits the 2013 reinsurers with the
incoming premium and loss portfolios.
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i. Preparation of 1st quarter account with example.
She prepares the 1st Quarter 2013 account as follows:

As will be noted, the reference numbers refer to the spread sheet. Thus F7 on the spreadsheet is the gross written
premium for the 1Q13, and this item is transferred as a debit to the reinsurance account, as Royal has to pay this
amount out to reinsurers.
The balance on the account is calculated independently by Mrs. Katu so she can double check against the balance on
her spreadsheet to be sure the figures have been correctly transferred. The balance due to reinsurers is $1,501,049.
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ii. Preparation of 2nd quarter account with example.

Premium 2nd Quarter = $397,104. Claims 2nd Quarter = $291,210
In this quarter the only items to account for are premiums, provisional commission and claims.
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ii. Preparation of 2nd quarter account with example
She prepares the following account:
As will be noted, the reference numbers refer to the spread sheet. Thus G7 on the spreadsheet is the gross written
her spreadsheet to be sure the figures have been correctly transferred. The balance due to reinsurers is $10,589.
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iii. Preparation of 3rd quarter account with example.

Premium 3rd Quarter = $485,349. Claims 3rd Quarter = $485,349
In this quarter the only items to account for are premiums, provisional commission and claims.
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iii. Preparation of 3rd quarter account with example.
She prepares the following account:

As will be noted, the reference numbers refer to the spread sheet. Thus H7 on the spreadsheet is the gross written
her spreadsheet to be sure the figures have been correctly transferred. The balance due from reinsurers is $116,484.
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iv. Preparation of 4th quarter account with example.

Premium 4th Quarter = $690,459. Claims 4th Quarter = $617,718. Outstanding losses at 31.12 = $441,227.
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As part of the process she needs to calculate the final commission payable. She thus prepares a spread sheet to attach
to her accounts as follows:
As will be noted, the reference numbers refer to the spread sheet. Thus F16 on the spreadsheet is the incoming
premium portfolio credited at the 1Q13, and this item is transferred as a debit to the reinsurance account, as Royal
has to pay this amount out to reinsurers.
This spread sheet follows the following process:
1. Calculation of earned premium.
2. Calculation of incurred loss.
3. Calculation of loss ratio.
4. Reference to sliding scale commission table to establish final commission rate.
5. Apply final commission rate to gross written premium income.
6. Calculate amount due subtracting the provisional commission charged to reinsurers.
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Mrs. Katu then prepares the following account:

As will be noted, the reference numbers refer to the spread sheet. Thus I7 on the spreadsheet is the gross written
her spreadsheet to be sure the figures have been correctly transferred. The balance due from reinsurers is
$1,338,706.
Rendering accounts involving sliding scale commissions is relatively straight-forward provided a clear process is
followed.
QUESTION SLIDE
A. The balance of the 4Q13 account, including the commission adjustment is $1,768,214
B. The balance of the 4Q13 account, including the commission adjustment is $1,846,430
C. The balance of the 4Q13 account, including the commission adjustment is $1,968,214
D. The balance of the 4Q13 account, including the commission adjustment is $1,646,430
Select your answer

ABCD
GOOD ANSWER
Well done, good answer. The commission adjustment is calculated as below (and when included with the other
items in the 4Q13 column, then the balance is $1,846,430.:
00:00
00:00
CONTINUE
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b. Preparation of consecutive profit commission statements with losses carried forward to extinction with
example.
The Aspire Insurance Company has a quota share treaty, the relevant terms of which are as follows:
Commission: 35%
Premium portfolio: 40%
Loss portfolio: 100%
Profit commission: 15%
Reinsurers expenses: 7.5%
Losses carried forward to extinction.
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example - continued.
4th Quarter account 2012
The accounts department of Aspire is advised as follows:

Premium 4th Quarter 2012 = $1,150,765. Claims 4th Quarter 2012 = $926,576
Outstanding losses: $661,840
Mr. Katu (his wife works at Royal Insurance Company in the accounts department) is responsible for preparing the
accounts, and he adds a column to his spreadsheet as follows:
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He goes through the following process:
1. He calculates the commission due to Aspire

2. He calculates the outgoing premium portfolio being the total written premium for the year multiplied by the
premium portfolio percentage.
3. He calculates the outgoing loss portfolio being 100% of the outstanding losses.
4. He calculates the total premium for the year for the profit commission calculation.
5. He enters the incoming premium portfolio credited in the 1st quarter account for the profit commission
calculation.
6. He enters the incoming loss portfolio credited in the 1st quarter account for the profit commission calculation.
7. He enters the outgoing premium portfolio calculated at 2 above for the profit commission calculation.
8. He totals the commission for the year for the profit commission calculation.
9. He multiplies the figure at 4 above by 7.5% to calculate reinsurers expenses for the profit commission calculation.
10. He totals the losses paid for the year for the profit commission calculation.
11. He enters the outgoing loss portfolio debited in the 4th quarter account for the profit commission calculation.
12. He calculates the result for the year.
13. As losses are carried forward to extinction, he enters the loss to be carried forward.
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He then prepares the 4th Quarter account as follows:

premium for the 4Q12, and this item is transferred as a debit to the reinsurance account, as Aspire has to pay this
The balance on the account is calculated independently by Mr. Katu so he can double check against the balance on
his spreadsheet to be sure the figures have been correctly transferred. The balance due from reinsurers is $2,330,254.
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Mr. Katu also prepares a profit commission statement as follows:

Once again the reference numbers refer to the spread sheet.
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Premium 4th Quarter 2013 = $1,380,918. Claims 4th Quarter 2013= $803,033
Mr. Katu is responsible for preparing the accounts, and he adds a column to his spreadsheet as follows:
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calculation.
13. As losses are carried forward to extinction, he enters the loss to be carried forward.
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Slide 42/74

The main items to note are the entries just above. The year has produced a profit of $287,920, but the loss of the
previous year has been brought forward, resulting in a net loss over both years of $174,921, thus no profit
commission is payable.
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Premium 4th Quarter 2014 = $1,611,071.
Claims 4th Quarter 2014= $864,805
Mr. Katu is responsible for preparing the accounts, and he adds a column to his spreadsheet as follows:
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calculation.
13. As the year, including losses brought forward, has resulted in a profit, he calculates the profit commission.
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The main items to note are the movements just above. The current year has made a profit of $532,684, there has
been a loss brought forward of $174,921. The net results in a profit of $357,762 and thus a profit commission is
payable of 15% of this figure ie $53,664 which has been included in the 4th quarter account.
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c. Preparation of accounts with loss participation and loss corridors with example.
Once the reader is familiar with the preparation of profit commission statements, then loss participation and loss
corridors are just a variation on this theme. The objective is to calculate the amounts, if any, and prepare accounts
accordingly.
Thus stop loss treaties often require the cedant to be a co-reinsurer. If the cedant must also participate in losses,
some reinsurers will feel more comfortable with the risk they are being asked to take. In such cases the cedant can
be treated similarly to other reinsurers, and the amount of the co-insurance is simply added to the retention.
For example, the overall loss to reinsurers for the year is $100,000 and the ceding company has a 10%
co- reinsurance then collection accounts are prepared for $90,000 to collect from reinsurers and $10,000 is simply
added to the amount of loss retained.
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c. Preparation of accounts with loss participation and loss corridors - continued.
Loss corridors are a little more complex as generally the cedant is liable for all losses falling within the loss corridor.
The example above quotes as follows: “reinsurers shall be liable for all losses up to a loss ratio of 76% and for all
losses exceeding a loss ratio of 105%. The reinsured shall be its own reinsurer and liable for all losses exceeding
a loss ratio of 76% and up to a loss ratio of 105%”.
Mr. Katu is reviewing and preparing the 4th quarter 2014 accounts for Aspire’s motor quota share. The results have
not been good, and the year looks as follows:
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c. Preparation of accounts with loss participation and loss corridors - continued.
Mr. Katu works out the loss ratio as defined in the treaty wording as follows:
As reinsurers are only liable for loss up to a loss ratio of 76% (and beyond a loss ratio of 105%), Mr. Katu needs to
adjust the 4th Quarter accounts to reflect this. The simplest way to effect this is to firstly calculate a loss ratio of
76% based on the earned premium above of $1,825,049 = $1,387,037. Then credit reinsurers with the difference
between the incurred loss figures of $1,770,993 and the incurred figure based on a loss ratio of 76%. The credit is
thus $383,955 (1,770,993 minus 1,387,037). This credit is included in the 4th quarter account.
QUESTION SLIDE

There is a loss corridor from a loss ratio of 76% to 96%. Which of the following statements is correct ?
A. To take account of the loss corridor the 4Q14 account must include an additional payment to reinsurers of
$0
B. To take account of the loss corridor the 4Q14 account must include an additional payment to reinsurers of
$27,318
C. To take account of the loss corridor the 4Q14 account must include an additional payment to reinsurers of
$29,318
D. To take account of the loss corridor the 4Q14 account must include an additional payment to reinsurers of
$34,318
Select your answer
ABCD
GOOD ANSWER
Well done, good answer. The calculation is as follows:

00:00
00:00
CONTINUE
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4 - MORE COMPLEX NON-TRADITIONAL ACCOUNTING
a. Accounting under a financial quota share with example
A financial quota share treaty is very similar to a treaty either with a loss corridor or with a sliding scale
commission. The purpose is to pass a limited risk to the reinsurer while at the same time benefitting from the
capital relief. In many cases it is like “wanting to have your cake and eat it”, as only in a regulatory regime which is
very tolerant or outdated will it be possible to benefit from capital relief and at the same time transfer very limited
risk.
Accounting where there is a loss corridor will be similar to the example at 3c above.
Depending on expected results, a penal sliding scale might also be used as below:
In the above example the ceding company is willing to accept penal rates of commission in exchange for capital
relief, and the reinsurer will receive a steady 2% up to a loss ratio of 94%.
If the ceding company in addition accepted a loss corridor from a loss ratio exceeding 94% up to 105%, then
reinsurers would be guaranteed a 2% margin up to a loss ratio of 105%. Again depending on the possible loss ratios
to be expected this might be similar to guaranteeing the reinsurers a profit. This is likely to result in serious
regulatory or compliance issues.
Nevertheless the focus here is on accounting and the process employed above when accounting for sliding scale
commissions or loss corridors applies equally here.
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b. Collateral and collateral accounting with example
An example of a collateral wording incorporated in a reinsurance treaty could be as follows:

Until such time as reinsurer determines that there is no further liability under this reinsurance Cedant shall
provide to reinsurer no later than sixty (60) days after the close of each calendar quarter a statement of the
aggregate value of the Collateral Assets held in the Collateral Account at the Calculation Date (the “Deposit
Value”).
In the event that the Deposit Value is less than the Required Amount, reinsurer shall issue a notice which shall
state the amount of the deficit, in which case Cedant shall be required to deposit Collateral Assets to a value not
less than the deficit in order to restore the balance to not less than the Required Amount within sixty (60) days of the
relevant Calculation Date; or
In the event that the Deposit Value exceeds the Required Amount, reinsurer shall issue a notice which shall state
the amount of such excess, in which case Cedant shall be entitled, at its discretion to withdraw Collateral Assets
from the Collateral Account in an amount not exceeding the excess.
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c. Preparation of experience accounts with example
An example of an experience account wording incorporated in a reinsurance treaty could be as follows:
Notional Experience Account
During the Term of this reinsurance the reinsurer shall record the information required to calculate the balance of
the Notional Experience Account.
The Notional Experience Account Balance as of any Calculation Date shall be as follows:
X=A+B+C–D
where:
X = Notional Experience Account Balance as of any Calculation Date
A = the balance (whether positive or negative) of the Notional Experience Account as of the previous Calculation
Date
B = 95% of any Premium received by the reinsurer since the previous Calculation Date
C = the interest calculated in respect of the Notional Experience Account balance from the previous Calculation
Date until the current Calculation Date (at the rate agreed herein e.g. LIBOR minus 20 basis points if balance
positive and LIBOR plus 50 basis points if balance negative)
D = Losses paid by the reinsurer to the Cedant since the previous Calculation Date.
Within 15 days of the end of each Quarter the reinsurer shall calculate the Notional Experience Account and
provide report to Cedant (in an agreed format).
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c. Preparation of experience accounts with example – continued
Important points to note are as follows:
- The experience account at any one time is the sum of 95% of the premiums paid by the cedant plus interest less
losses paid by the reinsurer. (Thus the reinsurer in this example gets a “margin” of 5% of the premiums).
- If the experience account is positive, then the reinsurer pays interest at, in this example, LIBOR less 20 basis
points. Thus the reinsurer is taking 20 basis points to cover its cost of managing the funds.
- If the experience account is negative, then negative interest is added based on LIBOR plus 50 basis points that is
to say the cedant pays a penal rate if the experience account is negative.
- It is also common that if the experience account is negative, then the cedant needs to provide collateral to
the reinsurer for the negative amount – see b. above.
Thus at the beginning of a reinsurance transaction involving an experience account the experience account, in this
example, will receive premiums. If premiums are $100,000, then $95,000 will be credited to the experience account.
At the end of the first quarter, the experience account balance will be $95,000, and interest will be calculated from
the date the money was received until that quarter date. Thus if the money was received on 15th January 2015, then
interest will be payable from 15th January 2015 until 31st March 2015(say $1,000). If say on 15th April
the reinsurer must pay out $80,000, then the balance from that date in the account is $96,000 minus $80,000 =
$16,000. If there were no other movements, then at 30th June interest would be payable on $96,000 up to 14th April,
and on $16,000 from 15th April to 30th June. Should the account at any time become negative, then negative
interest would be payable and very likely collateral from the cedant would be required.
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b. Collateral and collateral accounting with example – continued
On the above basis the cedant will be holding, in a suitable escrow or protected account to which the reinsurer has
access under certain defined conditions, collateral in approved cash or bonds or equities the value of which will vary
according to the value of the currency (if there is a foreign exchange issue) or the bonds and equities in the financial
markets.
The reinsurer wants to be sure that the value of the collateral remains at the required level, and hence the cedant
must provide details of the value in the above wording quarterly.
Generally this will be in some sort of approved format and based on currency values provided on a specific quarter
date by a defined bank, and bond and equity values provided on a specific quarter date by a defined stock exchange.
The advantage is that the cedant can in this way invest or manage its assets while at the same time the reinsurer is
assured that at the end of each quarter the collateral is at least at a required minimum.
Thus the cedant may prefer to hold the equivalent of $500,000 in local currency, the equivalent of $500,000 in local
bonds, and the equivalent of $500,000 in local equities. Each quarter the cedant will provide the reinsurer with a
statement based on the rate of exchange (for the currency) and the price of the bonds and equities, so that the value
of the collateral at that date in $ is given. If the value is less than $1,500,000, then the cedant must make up any
deficiency, if the value exceeds $1,500,000, then the cedant may reduce the amount in the collateral account by the
excess.
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5 - MORE COMPLEX ACCOUNTING
The calculation of reserves and portfolios should, theoretically, follow the same principles especially where both
reserves and portfolios exist in the same treaty wording.
a. Premium reserves
It is common practice for premium reserves to be calculated at a fixed rate of premiums and this is often 40%,
however other methods are also used and these are detailed below.
i. Straight percentage method with example
Based on a notional base commission of 20%, leaving 80% of the premium to cover the risk, and based on taking
half of this to represent the unearned premium at any year end, the straight percentage method usually uses a
percentage of 40%.
Thus, in quarterly accounts, the reserve is calculated on a quarter’s premiums and withheld for a year to be released
in the same quarter of the following year, e.g.:
Slide 57/74
a. Premium reserves – continued

As can be seen in the above table, as each quarter of premiums is credited to the reinsurer a 40% part of those
premiums is debited and retained in the premium reserve account. The retained amount is released in the same
quarter in the following year. Thus, in the above example, one can note that in the 2Q13 (in column 3) an amount of
1,400,000 was retained, and it is released in the 2Q14 (in column 4).
Slide 58/74
ii. 8th system with example
Another method is the 8th system, this involves more work than the straight percentage method, and less work than
the 24th system. The process is based on quarters of a year, thus on 31st December of any year 7/8th of the premium
of the first quarter has been earned. For the second quarter 5/8th, for the third quarter 3/8th and for the last quarter
1/8th.
An example calculation is worked out below:
iii. 24th system with example
The 24th system involves more work than the 8th system, but is much less work than the 365th or pro-rata temporis
system. The process is based on the months in the year, thus on 31st December of any year 23/24th of the premium
of January has been earned, 21/24th of the premium of February has been earned etc. An example calculation is
worked below:
Slide 59/74
It will be noted that there is not much variation in amount (using the same premium figures) between the 1/8th and
the 1/24th system, the former produces an unearned premium of $1,898,565, while the latter produces a figure of
$1,903,405. (Interestingly using the 40% straight percentage system results in an unearned premium of $1,489,835
which is a much bigger difference.)
iv. 365th system or pro-rata temporis with example
The 365th system, also known as the pro-rata temporis system takes each individual policy and works out the
unearned premium based on the number of days the policy still has to run.
Thus, for example, a policy issued on 10th January has run for 355/365th days by the 31st December and 355/365th
of the premium has been earned. Whether it is necessary to go into this detail to work out the unearned premium is
questionable.
QUESTION SLIDE
Given the following premium information:
A. The 40% system produces a premium reserve for the year of $2,358,228
B. The difference between the 1/8th system and the 1/24th system for the year is $7,985
C. The 1/8th system produces a premium reserve for the year of $3,130,618
D. The 1/24th system produces a premium reserve for the year of $3,132,633
Select your answer
ABCD
GOOD ANSWER
00:00
00:00
CONTINUE
Slide 61/74
b. Premium portfolios (very similar to premium reserves)
Portfolio premiums:
The term “portfolio premium” means that proportion of the net premium of an insurance policy that at any given
time relates to the unexpired period of the insurance. For example, if a policy runs from 30th June 2015 to 29th of
June 2016, then at 1st January 2016 (which is often the renewal date of a cedant’s proportional programme) the
policy still has six months to run.
In a proportional reinsurance account the assumption or withdrawal of unexpired cessions is effected by an

assumption or withdrawal of a “portfolio premium” (assumption = incoming unexpired risk, withdrawal = outgoing
unexpired risk).
For the calculation of portfolio premiums to be mathematically correct, the unexpired premium on individual
cessions should be calculated by counting the number of days the policy still has to run at the anniversary date of the
treaty to the end of the policy period, and then applying the number of unexpired days to the net premium to arrive
at the pro rata premium relating to this unexpired period.
Under a treaty with hundreds of cessions commencing at various dates, the cost and inconvenience of calculating
portfolio premiums in this way would be considerable.
Various methods have been used to simplify this process, which are all very similar to the methods used to calculate
premium reserves or the portion of unearned premium.
Slide 62/74
b. Premium portfolios (very similar to premium reserves) – continued
Portfolio premiums:
i. Straight percentage method with example
This method, which usually simply takes 40% of the premiums for the year, can be seen in the example below:
It will be seen that in this case the result is an amount of GBP 10,620,000. Thus the reinsurers in the calculation year
would be debited with their share of GBP 10,620,000 and reinsurers in the next year would be credited with their
share of this sum.
Slide 63/74
Portfolio premiums:
ii. 8th system with example
An example of the 8th system is given below:

The logic is to take the mid-point in each quarter, and apply a fraction based on each quarter having two periods, the
first up to the mid-point of the quarter the second from the mid-point to the end of the quarter. Based on each quarter
having two periods, so 4X2=8 and hence the 8th system.
Slide 64/74
Portfolio premiums:
iii. 24th system with example
An example of the 24th method is given below:

The logic is to take the mid-point in each month, and apply a fraction based on each month having two periods, the
first up to the mid-point of the month, the second from the mid-point to the end of the month. Based on each month
having two periods, so 12X2=24 and hence the 24ths system.
In the table above 1/24th of the premium for January is calculated, 3/24ths or 1/8th of the premium for February is
calculated, 5/24ths of the premium for March, etc to the end of the year, and each of these individual results is
totaled to give the figure of GBP 8,962,645.83 in the example above.
Based on this example, the reinsurers in the calculation year would be debited with their share of GBP 8,962,645.83
and reinsurers in the next year would be credited with their share of this sum.
Slide 65/74
Portfolio premiums:
iv. 365th system or pro-rata temporis with example
The 365th system, also known as the pro-rata temporis system takes each individual policy and works out the
unearned premium portfolio amount based on the number of days the policy still has to run.
Thus, for example, a policy issued on 10th January has run for 355/365th days by the 31st December and 355/365th
of the premium has been earned, and 10/365th of the premium would represent the premium portfolio amount for
that individual policy. Whether it is necessary to go into this detail to work out the unearned premium portfolio is
questionable.
Slide 66/74
Portfolio premiums:
v. Revision note: Loss Portfolios
Just as there is a need to equitably transfer the unexpired risk from outgoing reinsurers to the incoming reinsurers in
a subsequent year, so the same needs to be done in respect of outstanding losses.
Generally the calculation of the loss portfolio is based on 100% of the outstanding losses. At the anniversary date,
the outgoing reinsurers are debited with their share of the losses outstanding and the incoming reinsurers are credited
with their share of this sum.
On a “clean-cut” basis, the reinsurer will be credited with its share of portfolio losses at the anniversary date of the
treaty. Upon termination of the treaty year, the reinsurer will be debited with its share of a portfolio loss
withdrawal.
Even for continuing reinsurers, the portfolio premiums and losses will be withdrawn upon termination of the treaty
year and reassumed at the renewal date. This system greatly reduces the administrative work involved, compared
with treaties allowing risks to run off to natural expiry.
Slide 67/74
6 - THE DISTRIBUTION OF RISKS AND LOSSES THROUGH REINSURANCE PROGRAMMES
Please read carefully the complex case study contained in your manual, which is downloadable at any time
QUESTION SLIDE
Using Intrepid’s reinsurance programme as detailed in your manual - section 6 – complex case study, distribute the
following risks:
A. Second surplus reinsurers receive a premium of $31,483.70

B. First surplus reinsurers receive a premium of $49,364.38
C. Quota share reinsurers receive a premium of $7,445
D. Intrepid receives a premium of $4,830 for their Quota Share retention.
Select your answer

ABCD
GOOD ANSWER
00:00
00:00
CONTINUE
Slide 69/74
7 - PREPARATION OF AS-IF STATISTICS
a. proportional as-if statistic with example
If we once again review the losses that Mrs. Montz had to process for
Intrepid’s proportional reinsurance programme during her busy week in March, but this time with all the
premiums included, we get the following:
Slide 70/74
a. proportional as-if statistic with example – continued
If, purely for the sake of example, the above were the sole risks written by Intrepid with losses and there were
additional risks distributed over the reinsurance programme with total premiums of $22,000,000, then we could
process the figures above and make up statistics as follows:
The above statistic reflects the claims Mrs. Montz had to process during her busy week in March plus the additional
premiums of $22,000,000 distributed over the quota share, and the 1st and 2nd surplus treaties. These results show
loss ratios (losses/premiums) as follows:
Quota share: 12%
1st Surplus: 91%
2nd Surplus: 180%
Slide 71/74
a. proportional as-if statistic with example – continued
Let’s say Intrepid decide that for the next annual reinsurance period they will no longer write paint factories and
super markets. Then one could produce a statistic AS-IF such risks had NEVER BEEN IN THE PORTFOLIO. The
argument would be that since Intrepid is no longer writing such risks, then it should show a statistic as it would have
been without these risks.
Such an as-if statistic would look as follows:

It will be noted from the above statistic that the comparative loss ratios are now as follows:
Quota share: 4% instead of 12%
1st Surplus: 5% instead of 91%
2nd Surplus: 0% instead of 180%
These figures are dramatically different, one reflecting the actual results of a given set of proportional treaties for a
particular annual period, the other the as-if reflecting a portfolio as-if certain risks had never been written.
Both sets of figures reflect a certain reality, but quite clearly as-if statistics can be very misleading where a
description of why they are as-if, or the actual past figures, are not fully explained.
Slide 72/74
b. non-proportional as-if statistic with example
A similar picture can be seen using as-if statistics under Intrepid’s non-proportional programme.
If we once again review the losses that Mrs. Montz had to process for Intrepid’s non-
proportional reinsurance programme during her busy week in March, we get the following:
If we extract from these figures the results of the non-proportional programme based purely on these losses, we get
the following statistics (based on the M&D premiums):
Slide 73/74

b. non-proportional as-if statistic with example – continued
If we now produce as-if figures extracting losses caused by paint factories and super markets, the statistic changes as
follows:
Once again a very different picture.
Conclusion: Beware as-if statistics !
Slide 74/74
8 - CONCLUSION
This course has been designed to expand the knowledge base built in earlier courses and especially to enhance
your reinsurance accounting skills. The ability to correctly cede risks to the different treaties, to account for those
risks accurately, to request cash loss payments where necessary, and to produce different kinds of statistics are all
vitally important processes.
Equally to be familiar with some of the additional processes connected to non-traditional transactions such as
managing collateral and producing experience accounts in a world where these forms of reinsurance are rapidly
developing can be useful when faced with these challenges.
Understanding and being comfortable with accounting terminology and financial reports are necessary aspects of
good management and effective negotiation.
Stakeholders will judge your company by its financial performance and the more transparent the figures and the
more lucid the explanations of the good, and the less good points, the better your stakeholders will support you
through the good and the more challenging times.

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1 – INTRODUCTION

The main sections of this on-line course are as follows:

 More complex non-traditional accounting.

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

The main sections of this on-line course are as follows:

 More complex accounting

 The distribution of risks and losses through reinsurance programmes

 Preparation of as-if statistics

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

Burning cost premium calculations

The wording of such a condition in the reinsurance Slip can read as follows:

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

Burning cost premium calculations – continued

i. Preparation of minimum and deposit premium account with example.

5 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

Burning cost premium calculations – continued

ii. Preparation of premium adjustment account with example.

1. Calculation of burning cost: Incurred losses/Earned premium = 6.6%

2. Application of loading factor: 6.6% x 100/75 = 8.8%

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

Burning cost premium calculations – continued

Mrs. Katu thus prepares the following account for the reinsurer

Burning cost premium calculations – continued

$2,500,000 x ($3,784,827/$10,000,000) x (319/365) = $826,959.

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

Burning cost premium calculations – continued

She thus prepares the following account for the reinsurer

CHANGE PASSWORD LOG OUT

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

Burning cost premium calculations – continued

$5,046,436 x ($3,784,827/$10,000,000) x (319/365) = $1,669,278

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

Burning cost premium calculations – continued

Mrs. Katu then prepares the following account:

Given the details below:

Which of the following statements is correct?

A. The adjustment premium is $3,606,537

Select your answer

You can now continue the course

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

The relevant terms of the Slip are as follows:

i. Preparation of minimum and deposit premium account with example

b. stop loss treaty – continued

ii. Preparation of final account with loss participation with example

Mrs. Katu thus prepares the following account for the reinsurer

c. Top and drop excess of loss treaty

Please refer to your manual for revision notes from course 2.

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

i. Preparation of minimum and deposit premium account with example.

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

c. Top and drop excess of loss treaty – continued

ii. Preparation of provisional accounts with example.

Final subject matter premium income = $16,159,072.

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

c. Top and drop excess of loss treaty – continued

ii. Preparation of provisional accounts with example.

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

c. Top and drop excess of loss treaty – continued

ii. Preparation of provisional accounts with example.

Mrs. Katu thus prepares the following account:

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

c. Top and drop excess of loss treaty – continued

05 - ADVANCED TECHNICAL REINSURANCE ACCOUNTING

Given the details below: