Professional Documents
Culture Documents
Non Proportional Treaties
Non Proportional Treaties
REINSURANCE
Submitted by:-
Khushboo balani
Keshav trikha
NON PROPORTIONAL REINSURANCE
In Non- proportional reinsurance , it is the size of the loss that
matters rather than any proportionality. The primary insurer
agrees to cover all losses upto certain retention. Beyond this
amount , the reinsurer will reimburse the primary insurer for its
losses, upto a certain predefined limit.
In “non-proportional” treaties the operative word is “retention.”
The reinsurer doesn't get involved with a loss until a
predetermined retained limit of loss or retention, which the
Ceding company will pay, is exceeded.
Example:
• Assume an insurer needs capacity to write Liability Business of Rs.10.0 lacs. It
determines that it can retain the first Rs.3.0 lacs loss on any risk.
• However, it needs reinsurance to apply to that part of any loss that exceeds the
retained limit of Rs.3 lacs
• Here an excess of loss treaty would be expressed as Rs.7 lacs Xs Rs.3 lacs
Following risk is written by the insurer for a limit of Rs.10 lacs.
Risk A - has a loss of Rs.5 lacs The insurer pays the first Rs.3 lacs (retention or priority or
underlying limit) and the reinsurer the remaining Rs.2 lacs.
Risk B - has a loss of Rs.1.50 lacs The insurer pays the entire loss with no indemnification
by the reinsurer as the loss is within underlying limit of Rs.3 lacs
Risk C - has a loss of Rs.9 lacs. The insurer pays the first Rs.3 lacs (retention) and the
reinsurer, Rs.6 lacs
Risk D - has a loss of Rs.11 lacs. The reinsurer pays excess of Rs.3 lacs (retention) upto
Rs. 7 lacs(Maximum limit). The total comes to Rs. 10 lacs. The difference of Rs. 1 lac is
not payable under the treaty as the limit is over. Hence it shall fall back upon the insurer.
Common Forms of Excess of Loss Treaty
Working Cover or Per Risk Cover(WXL) –
This cover provides protection in the event of loss caused to one risk. This is also known
as Underwriting Cover.
A per risk cover gives protection to reinsured in their day to day operation i.e. for each
and every risk involved in a loss when it exceeds a pre-agreed level (the priority) and up
to the pre-agreed limit.
Thus, if a number of risks are involved in the same loss event, the reinsured pays the pre
agreed /priority on each and the reinsurer pays the amount exceeding the priority on
each and every risk affected.
Example
Claim arising out of P.A.Policies and resulting in claims due to death and injuries to many
people due to accident of Bus, train, aircraft.
A per event limitation is often included to ensure that the cover only provides
protection against large single losses and not an accumulation of losses from one event.
Catastrophe or Per Event Cover (Cat XL) :–
• Catastrophe or Per Event Cover provides protection from large losses
involving more than one risk exposure in one event.
• Per event covers protect the reinsured against an accumulation of losses.
When the sum of the losses exceeds the pre-agreed amount (known as the
priority), the reinsurer will be liable to pay the excess up to a pre-agreed
upper limit.
• Typically per event covers are used to protect a company against catastrophe
events, such as riots, windstorm, flood, earthquake etc or the accumulation
of losses in a personal accident account from a major accident affecting many
individuals.
• A per event cover often contains a two-risk warranty to ensure that it will
not be affected by a single claim.
“Two risk warranty” is inserted to exclude one-risk exposures by requiring that
there be at least two risks involved in an occurrence to recover under CAT XL.
The following loss events illustrate the way Working Cover or Per Risk Cover (WXL) and Cat
XL covers work.
Example
After application of all proportional reinsurance covers, a direct insurer's retention is 8.0
crores. To further protect, his retention from major loss, he then buys a Per Risk (WXL/R )
cover of 6 crores xs 2 crores.
As additional protection from catastrophic events he also buys a CatXL with the limits 9
crores xs 4 crores. Following are the different illustrative events which shall make clear the
distinction.
Loss event 1:
A fire leaves the direct insurer with a loss of 1 Crore for his own account.
Distribution of losses
Distribution of losses
A 1 crore 1 crore 0 0
B 1 crore 1 crore 0 0
C 1 crore 1 crore 0 0
D 2 crores 2 crores 0 0
E 4 crores 2 crores 2 crores
Total of 9 Crores 7 crores 2 crores 3 Crores
A,B,C,D (7-4=3)
Thus after total recovery of 2 crores under WXL, Direct Insurer retained
7 Crores out of loss of 9 crores. This 7 crores shall be recovered under
CATXL as under:
Direct Insurer to bear 4 crores (Retention)
Recovery under CATXL 3 crores
Total 7 crores
Per Portfolio covers (Stop Loss or excess of loss
Ratio reinsurance)
It may happen that there may be unforeseen rise in
claims frequency and the company may well find
itself with a high claims ratio at the end of an
accounting year.