Reinsurance - The Nuts and Bolts 3rd Edition

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Now in it's third edition this essential guide to reinsurance, ' Reinsurance: The Nuts and Bolts' has been completely re-written and updated. Many of the practices contained within the publication have been brought up to date to reflect todays standards with the inclusion of some additional subjects at the request of colleagues and readers.

It has been almost 12 years since the last revision of this title and a great deal has happened in the London market in that period. Regulation of both banking and insurance is now under the control of the Financial Services Authority and this has led to tighter controls over how insurance institutions in the UK conduct their business. In tandem with these changes, the London market has reformed itself considerably and the three organisations that formerly handled many back-office functions on behalf of their members, LPSO (Lloyd’s), LIRMA (London Non-Marine market) and ILU (London Marine market) have been brought together under the umbrella of XChanging-Insure Services. This has led to the introduction of the Market Reform Contract; a document that replaces the traditional broker’s slip with a standard form of contract, designed to incorporate the entire terms and thereby provide contract-certainty at the inception of the insurance or reinsurance. This has had an enormous impact on the working practices of reinsurance brokers. The traditional slip that could, in the past have been just a few pages, is now a full contract including the contract wording (a document that was previously signed after the contract came into force; sometimes, in fact, so long after inception that it may already have expired before it was signed!).

Reinsurance: The Nuts and Bolts is a must have for all professionals working, studying or with a general interest in Reinsurance.


Introduction 1

Introduction to the second edition 1

Introduction to the first edition 2

Chapter 1. What is Reinsurance, and why do we need it? 5

Chapter 2. Types of Reinsurance 8

Facultative 9

Pro-rata (or proportional) 10

Excess of Loss (non-proportional) 12

Treaties 16

Pro-rata Treaties 17

Quota Share Treaties 17

Surplus Treaties 18

Facultative Obligatory Covers 20

Cessions to treaties 22

Special considerations 23

Basis of cession 23

Top Location & Pro-rata Basis. 23

PML Basis. 24

Per policy basis 24

Per Bottom Basis 25

Per Vessel Basis 25

Per Person Basis 25

Practical Exercise 1 - Distribution of Premiums and claims over a proportional programme 26

Chapter 3. Treaty Reinsurance - Financial Aspects 28

Premiums 29

Commission 30

Tax 30

Premium Reserves: 31

Loss Reserves: 32

Interest on Reserves: 32

How Reserves are accounted 33

Losses 34

Cash Loss Refunds 35

Premium and Loss Portfolio Transfers 36

Clean-cut versus Underwriting Year basis 36

Clean-Cut basis 37

Calculation of unexpired premiums 38

The 1/24ths System 38

1/8ths System 39

A fixed percentage 39

Profit Commission 43

Practical Exercises 2 (a) and (b)- Profit Commission calculations 45

Deficit Carry Forward 45

Underwriting Year Basis 46

Chapter 4. Proportional Treaty Wordings and Clauses 50

Period and Termination 50

Special Termination and Reinsurer Downgrade 51

Errors and Omissions 52

Self Insured Obligations 53

Inspection of Records 53

Arbitration 54

Bordereaux 54

Chapter 5. Designing a Property Reinsurance Programme from historical data 55

Data 57

Apportionment over the treaty programme. 59

Constructing the Spreadsheet 60

Chapter 6. Excess of Loss Covers 68

Chapter 7. Excess of Loss Reinsurance - Financial Aspects 75

Premium 75

Rate 75

Premium Income 75

(Minimum and) Deposit Premium 76

The "Penal" M & D 77

Other variable factors 77

Loss Payments 78

"Hours Clause" 78

Practical Exercise 3 - Allocating Claims over an excess of loss programme 79

Reinstatement Premiums 81

Burning Cost Rating 83

Working Covers 83

Definition of Burning Cost 83

Burning Cost Spreadsheet Model 88

Chapter 8. Excess of Loss Rating 91

Exposure Rating 91

Constructing the Property Risk Excess Rating Model 95

Catastrophe Rating 106

Constructing a Catastrophe Rating Model 108

Chapter 9. Market Evolution 112

Chapter 10. Miscellaneous 114

Retrocession Treaties 114

Reinstatement Premium Protections 115

Additional Reinstatement Covers 115

“Alternative Reinsurance” 115

Thinking things through 116

“Graded Retentions make better treaties” 116

“Quota Share bad, Surplus good” 117

The Market Reform Contract (MRC) 118

Chapter 11. Over to you 132

Chapter 12. Appendices 133

Appendix 1 - Answers to Practical Exercise # 1 133

Appendix 2 - Answers to Practical Exercise # 2 135

Appendix 3 - Answers to Practical Exercise # 3 138

Appendix 4 - Specimen Scale of Property First Loss Rates 140

Appendix 5 - Specimen Treaty Wordings 141

Non Marine Surplus Treaty 141

Motor and General Liability Excess of Loss 155

Marine Cargo and Hull Excess of Loss 173

General Catastrophe Excess of Loss 187


Title: Reinsurance. The Nuts and Bolts 3rd Ed
Edition: Third
Number of Pages: 269
Product Code: WS1066K
ISBN: ISBN 13: 978-1-85609-536-5 (9781856095365), ISBN 10: 1-85609-536-3 (1856095363)
Published Date: May 2012
Binding Format: Paperback
Book Height: 235 mm
Book Width: 155 mm
Book Spine: 14 mm
Weight: 0.40 kg