RI Accounting for

Proportional Treaties

Mrs. Achala Nayak

Director
J B Boda & Co (S) PTE LTD.,
Singapore

1
What is Reinsurance?

It is a Risk Transfer from an Insurance

Company.
It is Insurance of Insurance
An Insurance Company pays Premium to
Reinsurance for the Risk Transfer.
A Reinsurance Company pays Losses to the
Insurance Company.
All these transactions are in a pre-decided
proportion.

2
What is Retention?

Retention is an amount,
an insurance company is willing
to risk for its own account
from a single loss

3
Why Reinsurance ?
An Insurance Company has its own limitations
to write business, linked to:
Its Capital and Free Reserves.
Size of the Risk, its Occupation & Premium

Accumulation of RisksPremium.

Profitability of Portfolio

Reinsurance Programme used

Market Forces and Reinsurance Capacity available

Such factors influence an Insurer to limit its own

retention and to effect Reinsurance

4
Methods of Reinsurance

PROPORTIONAL NON PROPORTIONAL

Facultative Facultative

(single risk) (single risk)

Treaty Treaty (Contracts)

(multiple risks) (multiple risks)

Quota Share. Risk XOL.
Surplus Catastrophe XOL.
Fac. / Obligatory. Stop Loss XOL
Open Covers

5
 Facultative RI
Characteristics
Similar to co-insurance;
Simplest and oldest method;

Optional i.e. free choice to decide;

Single risk method;

Full disclosure of all facts.

Follows all original policy conditions

6
Facultative RI
Advantages
In case of a small portfolio, where Treaty is
unattractive;
Where risk is outside the scope of the Treaty - e.g.
excluded class or Geographic Scope;
Where S I exceeds the Treaty Limit;
Expertise and capacity of big reinsurance can be
used,
Where the risk is hazardous and might destabilise
the Treaty

7
Facultative RI

Disadvantages
Full disclosure of the material facts.
Delay in seeking support.

High administrative costs in negotiation and

administration.
Lower rates of commission.

No Profit Commission.

Risk of overlooking the renewal placement.

Negotiation procedure to be adopted at each

renewal

8
Premium and Loss Distribution in
Facultative RI

9
Accounts for Facultative
Since Fac RI is a single risk transaction,
rendering of statement of premium & Claims
known as Closing is on individual basis.
At times there is PPW & the Cedant and the
Broker must adhere to it.
Closing must follow within a reasonable time
after the signed line is advised and certainly
before the expiry of the PPW. If for any
reason, there is a delay, Reinsurers
permission needs to be taken for extension of
PPW.

10
Accounts for Facultative

Name of Broker & Ref. No.

Name of Cedant & Ref. No.
Name of Assured and location.
Period of Cover / Perils Covered
TSI, Rate, Deductions
Actual working of 100% Premium
Reinsurers % share and the amount of
net premium
11
Accounts for Facultative
As regards Facultative Claims:
Each claim is Cash Claim, in so far the approval of the reinsurer is
concerned.
Irrespective of the amount of the claim, they should not be adjusted
in the remittance statement without obtaining concurrence of the
reinsurer.
The Facultative claim advice will contain:
Name of Broker & Ref. No.
Name of Cedant & Ref. No.
Name of Assured and location.
Period of Cover Date of Loss
Perils covered Cause of loss
Amount of Loss Intimated Settled
Outstanding
Reinsurers % share and share of loss

12
What is a Treaty?

Itis a contract / agreement

Gives automatic and continuous Capacity
to an Insurance Company.
Predefined Scope for
Period
Class / Classes of business
Retention and Cession limit under treaty
Geographical Scope
Also exclusions are specified.

13
Quota Share Treaty
Characteristics
Obligatory in nature.
Retention and cession on every risk
Operates on fixed percentage basis.
Meaningful retention required
Advantages
Simple form & easy to operate and administer.
Works like a partnership & Useful for a new company or for a new class of business,
where the results of business are unpredictable.
Useful for reciprocal exchange.
Disadvantages
Inflexible method of RI (unless VQS). Fixed percentage of premium on each ceded risk
forces large outflow of Premium.
Fails to reduce incurred claims ratio on the retained account.
Capacity offered is limited.

14
How does a QS treaty Work?

Risk SI
100,000
Premium Ceda Reinsurer
20,000 nt
Loss 25,000 Retains fully 100,000 If No Treaty
Premium 20,000
Loss 25,000
Net balance: (5,000)

Retains 50% 50,000 50% QS cession 50,000

Premium 10,000 Premium 10,000
At 30% rate Pays Comm of 3,000
Gets Comm. of 3,000 Loss 12,500
Retains Loss 12,500 Net balance: 5,500
Net balance: 500

15
Quota Share Treaty Cession

16
Surplus Treaty

Characteristics
Obligatory in nature.
Cession of policies, where SI exceeds the gross retention.
Hence retention on every policy, but cession may not be on
every policy (Like QS).
Placed in terms of lines (not in % like QS)
Capacity Treaty, as capacity can be stretched through number
of lines & through creation of first, second and third surplus
treaties.

17
Uses of Surplus Treaty

To handle large risks.

Simple and small risks well within the retention
capacity can be fully retained.
Higher retained portfolio generated through
retained premium & premium reserves.
Higher underwriting capacity.
Besides receives Profit Commission, if treaty
produces profitable results.
Useful for reciprocal trading.

18
How does a Surplus Treaty Work?

Capacity expressed in Lines (Times of

Retention).
If retention is say 100,000 and the Surplus
Treaty is of 10 lines, then the Capacity is
1,000,000.
Since it is a Surplus Treaty, the Reinsured will
retain all risks up to SI of 100,000 and cede
the balance to the Surplus Treaty.
Therefore every risk will not go to the Surplus
Treaty Reinsure.

19
Surplus Treaty Risks Distribution

20
QS & Surplus Treaties: Cessions

21
Distribution of Risk over QS & Surplus
Treaties

22
Distribution of Risk over QS & Surplus
Treaties

23
Risk Distribution over an RI Programme

QS Maximum 100% limit Rs. 500

Retention 40% and Cession 60%
1st Surplus of 8 line and 2nd Surplus of 8 lines
TSI % Premium Loss
Risk details 10,000 2,000 4,000
QS Retention 200 2% 40 80
QS Cession 300 3% 60 120
1st Surplus 4,000 40% 800 1,600
2nd Surplus 4,000 40% 800 1,600
Facultative 1,500 15% 300 600
Total 10,000 100% 2,000 4,000

24
Why do we require RI A/c ?
U/W and A/C are inextricably related.
They are two sides of the same coin.
Together they determine the financial
performance of the Reinsured and the
Reinsurer.
A Statement of Account (SOA) is summary of
Ceding Companies transactions of
Premiums and Claims,
For a Class of business,

For a Period of time.

25
Why do we require RI A/c ?
Because:
They are the records of transactions between the
parties to an RI Contract.
Information contained in the RI A/c is required by
the Reinsurer to enable it to prepare:
A/c for its own retro-cessionaries.
Financial A/c (i.e. Profit & Loss, Balance Sheet) and to

file returns to the Regulator.

Provide data for assessment of technical reserves
(i.e. unearned premium and O/S loss) and for
preparation of underwriting statistics & evaluation of
each treaty.

26
Premium Bordereaux

Purpose:
To record each cession of premium to the
reinsurance treaties so that:
premiums can be allocated easily to reinsurance;
there is a convenient list of cessions that can be
used as the basis for allocating claims;
statistics may be compiled easily;

reinsurers are aware of the type of business that

they are accepting.

27
Premium Bordereaux

Class: e.g. fire, accident, etc..

Month: a bordereau should be prepared for
each month.
Page number: to ensure that pages are not
misplaced if the bordereau for a month runs
onto more than one page.
Date: date of preparation of bordereau.
Reinsurer: to identify the reinsurer to whom
the bordereau is to be sent.
Reinsurers share: for the reinsurers
reference.

28
Premium Bordereaux
Cession number: so that each cession to reinsurance can
be identified a sequential number is allocated.
Policy number.
Name of insured.
Effective date: date of commencement of policy, renewal
date or date of endorsement, alteration, etc.
Expiry date: date of termination, etc. of policy.
Type: type of premium (e.g., 1 - renewal; 2 - new; 3 -
endorsement; 4 - cancellation; etc.)
Building: use of building, e.g., dwelling, farm, office, etc.
Sums insured and premiums

29
Claims Bordereaux

Purpose
To record each claim to be recovered
from the reinsurance treaties so that:
claims can be recovered correctly from
reinsurers;
statistics may be compiled easily;
reinsurers are aware of the losses they are
being asked to pay and can establish
adequate reserves.

30
Claims Bordereaux

Class: e.g., fire, accident, etc.

Month: a bordereau should be prepared for
each month.
Page number: to ensure that pages are not
misplaced if the bordereau for a month runs
onto more than one page.
Date: date of preparation of bordereau.
Reinsurer: to identify the reinsurer to whom the
bordereau is to be sent.
Reinsurers share: for the reinsurers reference

31
Claims Bordereaux
Policy number.
Cession number: so that each cession to reinsurance can
be identified a sequential number is allocated.
Name of insured.
Claim number.
Date of loss: so that the loss can be allocated to the
correct years reinsurers.
Type of loss: theft, fire, etc.
Payment: to identify multiple part payments of a loss. The
column should be completed with first, second, etc.,
and, when a final payment is made final should be
entered so that reinsurers will know that they can close
their file on the loss.
32
Claims Bordereaux

Gross loss: the amount of the payment to the insured

(or third party) by the company.
Gross expenses: the amount of additional expenses
incurred in settling the claim, for example loss
adjusters fees.
Total loss and expenses: the sum of columns 8 and 9.
Retained loss: the amount of the loss that falls to the
company after recoveries from reinsurance.
Losses ceded: the amounts to be recovered from
various reinsurance arrangements.

33
Loss Notification
SHOULD BE ON COMPANY LETTER-HEAD, MENTION DATE, TREATY NAME & U/W YR

The details of the loss are as follow:

Insured: ___________________________________________
Policy number: ___________________________________________
Policy period: ___________________________________________
Claim number: ___________________________________________
Date of loss: ___________________________________________
Cause of loss: ___________________________________________
Circumstances of loss:
___________________________________________
___________________________________________
Estimated gross loss: ___________________________________________
Estimated treaty loss (100%): ______________________________________

It is/is not expected that a cash loss settlement will be requested in respect of this claim.
We will keep you informed of all developments regarding this claim.

34
Cash Loss (CL)
To enable immediate recovery of very large
losses.
If CL Limit is 1,000,000, a loss recovery of
more than 1,000,000 becomes eligible for
immediate Cash Call.
CL settlement by Reinsurer is kept in
suspense A/c which is squared off when that
particular loss is included Paid Claims of
statement of account & CL Credit is given to
reinsurers who have paid the claim.

35
Submission of SOA

At regular intervals, a:
treaty account
will be dispatched to all reinsurers. The
account will contain technical and financial
items and forms a statement of amounts
due to or from the reinsurer.

36
SOA will usually have following
debit and credit items
Credited to Reinsurers
o Premiums net of returns and
cancellations.
o PR Released.
o LR Released.
o Interest on Reserves.
o P P/F incoming.
o L P/F incoming.
o Refund on Cash Loss
Debited to Reinsurers
o Ceding Commission.
o Tax on Premium.
o PR retained.
o LR retained.
o Paid Claims.
o P P/F Withdrawal.
o L P/F Withdrawal.
o Profit Commission.
37
Company Letter Head
U/W Year 2009
Quarter 3rd Q
QUARTERLY
Treaty Name &STATEMENT
Quarter Period: 1.7.09 to 30.9.2009 DEBIT CREDIT
Date
PREMIUMS: RECEIVED - RETURNED 50,000
COMMISSION @ 30% 15,000
REINSURANCE TAX @ 5% 2,500
CLAIMS PAID LESS RECOVERIES 15,000
PREMIUM RESERVE RETAINED @ 35% 17,500
PREMIUM RESERVE RELEASED (PREV Q) 20,000
INTEREST ON PR RELEASED 200
BALANCE 20,200
TOTAL 70,200 70,200
BALANCE BROUGHT FORWARD 20,200

J B BODA SHARE: 30%

% Net payable
EAGLE REINSURANCE CO 10.00% 2,020
SPARROW REINSURANCE CO 15.00% 3,030
PARROT REINSURANCE CO 5.00% 1,010
TOTAL 30.00% 6,060
38
Periodicity of rendering Accounts
Accounts can be rendered on Quarterly,
Half-yearly basis.
Traditionally Quarterly system is used
and is more desirable for Reinsurers as
accounts prepared on longer duration
delay receipt of premium & also delay
submission of information.

39
Commission

Consideration to meet actual net acquisition cost,

excluding salaries of staff.
An agreed % of Premium, paid by the Reinsurer
to the Reinsured.
Influencing factors:
1. Type of Treaty.
2. Class of business.
3. Country.
4. Results.
Usually uniform to all participants.
May differ for reciprocity.

40
Commission

Usually three methods employed:

Flat Percentage method.
Flat Percentage plus Additional Percentage.

Sliding Scale method.

41
Flat % Commission
This
is the simple and most commonly
used method.
The percentage of commission is defined in
the treaty slip, say 35%. This percentage is to
be applied to the gross or net premium,
accounted in that Quarter (as defined in the
terms) to arrive at the commission.
Gross Accounted Premium 1,000 X 35% = 350
commission.

42
Flat + Additional Commission

This is rather uncommon method.

A fixed percentage of commission is
guaranteed.
Besides, depending on the loss ratio, at the
end of the year additional commission is
payable to the Cedant.
Example commission 30% + 2 % is LR
below 60%.

43
S/S Commission

SlidingScale method ensures that the actual

rate payable is directly related to the loss ratio.
Which means more commission in good years
and lower commission in bad years.
Key factors:
Payment of provisional commission.
Calculation of loss ratio.

The Sliding Scale of Commission table.

Minimum and Maximum rate of commission payable.

Payment of actual commission due.

44
S/S Commission
Provisional Commission:
Unless loss ratios are known, the actual
commission can not be determined. Hence
provisional (interim) commission payable. Usually
this is fixed mid-way between the minimum and
maximum rate.
Minimum rate is 25%
Maximum rate is 35%
Provisional Commission will be 30%. This is
considered equitable as neither party can pre-judge
the final result of the treaty.

45
S/S Commission

Calculation
of Loss Ratio will depend on
method of accounting whether
Underwriting year or Accounting Year.
For underwriting year method of accounting
it is unusual to have S/S commission e.g.
Engineering, Marine and Aviation business
because these years take many years to
fully develop.
Reward for profit are dealt with through
Profit Commission.

46
Calculation of L/R for S/S commission
run-off Treaties
Loss ratio, being calculated at various
points in development of one u/w year,
will keep on changing until all liabilities
expire. The rate of commission directly
related to loss ratio, the actual level of
commission payable to the Cedant will
fluctuate and adjustments will have to be
done accordingly. Amount of
administrative work involved in this
calculation is enormous.
47
S/S Commission Table
As per practice, the treaty terms would include a
detailed scale of commission payable related to
actual loss ratio.
To determine the actual rate of commission
payable all that is necessary is to select the
appropriate rate from the scale.
Example: Loss Ratio 52.8% Commission 28.50%
Loss Ratio 66.60% Commission 21.50%
Loss Ratio 78.20% Commission 15.50%

48
S/S Commission- Min & Max Rates
The S/S commission will have a min rate and a
max rate.
The min rate reflects the least amount of
commission that the Cedant requires to take care
of its acquisition costs.
The max rate reflects the highest amount of
commission the Reinsurer is willing to give.
S/S commission itself includes the rewards for
profitability, hence it is not usual to encounter the
S/S commission and the PC in the same treaty,
although it may happen in practice.
49
Calculation of L/R for S/S commission

Formula used: (U/W year based treaties)

Incurred Loss X 100
Earned Premium

Incurred Loss Losses Paid during the year + O/S at the end of the
year
+ Reserve for O/S loss at the end. (LR)
- Return Reserve for O/S Loss from the previous year.
(RLR)

Earned Premiums Ceded for the year (P)

Premium + Return reserves for unearned premium from previous
year (RPR)
- Reserve for unearned premium (PR)
50
Calculation of L/R for S/S commission

Formula used: (Clean Cut Treaties)

Incurred Loss X 100
Earned Premium

Incurred Losses Paid / debited during the year

Loss - Incoming loss portfolio transfer
+ Outgoing loss portfolio transfer

Earned Gross Premiums Ceded during the year

Premium + Incoming Premium Portfolio
- Outgoing Premium Portfolio

51
Calculation of L/R for S/S commission
Clean-cut Treaties
Portfolio Premium and Losses apply at the beginning and at the
end of the year, regardless of Reinsurers share is new, increase,
reduced or cancelled. Formula as follows:

Incurred Losses Paid + -

Losses for the year P/F losses P/F Losses
withdrawn at assumed at
the end the beginning
Earned Premium + -
Premium ceded for the P/F P/F
year Premiums Premiums
assumed at withdrawn at
the beginning the end
52
Final adjustment of S/S
Commission
Until the loss ratio is known, provisional commission is paid.
Adjustment is done at the end of the year.
Assuming S/S Comm is 27.50% to 37.50% with provisional
commission of 30% adjustment as follows:
1st Q Premium 40,000 Provisional @ 30% 12,000

2nd Q Premium 50,000 Provisional @ 30% 15,000

3rd Q Premium 60,000 Provisional @ 30% 18,000

4th Q Premium 30,000 Provisional @ 30% 9,000

Total 180,000 54,000

Actual Commission due from L/R calculation @ 58,500

32.50% applicable to 180,000
Adjustment commission due to Ceding Co. 4,500
53
Overriding Commission

In Retrocession Treaties Commission

will include Original Commission + Profit
Commission + Brokerage in addition to
this an Overriding Commission will be
charged.
Sometimes in highly profitable & very
well balanced treaties O/R commission
is given.
Usually ranges between 2% to 5%.

54
Profit Commission (PC)

PC is the reward given to the reinsured

for providing profitable business, by the
reinsurer.
Amounts to sharing of profits of a
particular treaty.
Payable in addition to commission.
Applicable to Proportional treaties and
rarely seen on Non Proportional Treaties
or Facultative business.
55
Profit Commission (PC)

The simplest definition of Profit is

Income less Expenses.
The profitability of a reinsurance
contract is also determined using the
same formula. The items which will
appear under the heading Income and
Expenses need to be seen carefully
and they are explained as follows:

56
Profit Commission (PC)

Commission on Profit paid by the Reinsurers to the

Reinsured as per a formula.
Income:
1. Written Premium
2. P/F Premium & Loss Entry.
Outgo:
1. Commission, O/R, Tax.
2. Paid Losses.
3. P/F Premium & Loss Withdrawal.
4. Management Expenses.
After deducting L c/f, PC % to be applied on balance.

57
Profit Commission (PC)

Management expenses are not an

accounting item. It is a notional deduction
in the PC statement allowing Reinsurers
own expenses. This is to be calculated on
the Gross Premium at the rate prescribed
in PC formula.
Brokerage is not included in the outgo.
Because it does not appear in the Ceding
Companys original accounts.
58
Profit Commission (PC)
Income Outgo
1) P/F Premium 1) Commission.
2) P/F Loss Entry. 2) Any other deductions.
3) Original Gross 3) Paid Losses & Loss
Premiums included in expenses.
the accounts for the 4) P/F Premium withdrawal.
current year. 5) P/F Loss withdrawal.
6) Reinsurers Management
Expenses.

59
Profit Commission (PC)
Any Premium & Loss recoveries under
reinsurances which inure to the benefit of
the Agreement are to be taken into account.
Any excess of Income over the Outgo, will
be considered as profit.
Reinsured shall render the PC statement to
the Reinsurer for each annual period,
according to the PC formula.

60
Profit Commission (PC)
Formula: PC 10%, deficit c/f to 3 years, ME 7.5%
(but results shown below are net of the ME)
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
U/W 1 (5,000) (5,000) 1st (2,500) 2nd (2,500) 3rd
Yr Yr Yr
U/W 2 2,500
U/W 3 (1,200) (1,200) 1st (700) 2nd
Yr Yr
U/W 4 3,000
U/W 5 3,000
Result (5,000) (2,500) (3,700) (700) 2,300
10% PC Nil Nil Nil Nil 230

61
PC calculation for Engineering Treaty
Underwriting Year 1.1.2002 to 31.12.2002

As at 31.12.02 As at As at As at As at As at 31.12.06
31.12.02 31.12.03 31.12.04 31.12.05
INCOME
Premium 1,500,000 2,000,00 2,500,00 3,000,00 3,500,000
0 0 0
TOTAL INCOME 1,500,000 2,000,00 2,500,00 3,000,00 3,500,000
0 0 0
OUTGO
Commission at 25% 375,000 500,000 625,000 750,000 875,000
Claims Paid 500 1,000 1,000,00 1,500,00 2,000,000
0 0
Tax on Premium @ 5% 75,000 100,000 125,000 150,000 175,000
ME @ 5% 75,000 100,000 125,000 150,000 175,000
O/S loss at the end of yr 10,000 50,000 500,000 300,000 100,000
TOTAL OUT GO 535,500 751,000 2,250,00 2,850,00 3,325,000
0 0
Profit / (Loss) 964,500 1,249,00 250,000 150,000 175,000
0
PC at 20% 192,900 249,800 50,000 30,000 35,000 62
Less PC as last year 192,900 249,800 50,000 30,000
Super Profit Commission
Additional PC Net Profit :60,000
payable over and 15% PC :
above the normal 9,000
PC. Net Result :51,000
e.g. if the PC is 15%
30% Super PC :15,300
and Super PC is
30% the working will Total PC payable:24,300
be done as
indicated:-

63
Outstanding Losses

Throughout the treaty period, claims occur on

policies attached to the treaty.
Many of the claims are settled by the Insurer
and charged to the reinsurer in agreed
proportion.
However, some of these claims will not be
settled before the end of the treaty year.
These claims are known as Outstanding
Losses.

64
Outstanding Losses

Ceding Company estimates the likely

cost of Outstanding Losses and provides
the total of the estimates to the reinsurer,
usually at the end of the period.
This is for the purpose of information, so
that the Reinsurers can make sufficient
provisions for the losses to be paid at a
future date.

65
Proportional Treaty Accounts

One of the following two methods is

applied for preparation of Treaty
Accounts:
Underwriting Year Accounting System (Run
Off)
Accounting Year based Accounting System
(Clean Cut)
The methods can be viewed at a glance in the
following slide

66
U/W & A/C - at a glance
Accounting Year
U/W 2002 2003 2004 2005 Total
Yrs
2002 100 50 (120) 15 45
2003 X 80 45 5 130
2004 X X (55) 45 (10)
2005 X X X 60 60
Total 100 130 (130) 125 225
Result of each U/W year will be finalized when liability for that
year is expired.
Result of each A/C year may include items for more than one
U/W year
67
 U/W & A/C - at a glance

1998 1999 2000 2001 Total U/W yr

Year 1 Year 2 Year 3 Year 4
1998

1999

2000

2001

Total
A/c Yr
68
U/W Year Method (run off)
Suitable for classes where
Policies issued for more than 12 months
(CAR/EAR), premiums are collected over more
than one A/c year & exposure to the losses also
extends for same period.
Marine, Aviation, Liability, CAR, EAR etc. medium
to long tail business
Delays in settlement of account due to
Legal judgment / medical consideration
Repairs to be carried out

Cost of repairs extended over length of time

Recoveries to be received over bonds / credit claims

69
U/W Year Method (run off)

Any claim affecting the reinsurance treaty is

allocated to those reinsurers that received the
premium for that risk.
In any given quarter, there can be claims and
premiums relating to several underwriting years.
Therefore, it is essential to allocate premiums and

claims to the correct underwriting years and to

ensure that separate bordereaux and accounts are
produced for each underwriting year.
Profit commission statements will also be prepared

according to underwriting year.

70
 U/WA/cYear
Yr 02
Method (run off)
A/c Yr 03 A/c Yr 04 A/c Yr 05
Four
FourQtly
Qtly
Four
FourQtly
QtlyA/c
A/c Four
FourQtly
Qtly Four
FourQtly
Qtly
Run
Run offA/c
off A/c Run
Run offA/c
off A/c Run
Run offA/c
off A/c
Reinsurers Continue
U/W 2002 PC
PCCalculation
Calculation Revised
RevisedPC
PC Revised
RevisedPC
PC Revised
RevisedPC
PC

O/L
O/LAdvice
Advice Revised
RevisedO/L
O/L Revised
RevisedO/L
O/L Revised
RevisedO/L
O/L

Four
FourQtly
QtlyA/c
A/c Four
FourQtly
Qtly Four
FourQtly
Qtly
Run
Run offA/c
off A/c Run
Run offA/c
off A/c
Reinsurers Continue
PC
PCCalculation
Calculation Revised
RevisedPC
PC Revised
RevisedPC
PC
U/W 2003

Revised
RevisedO/L
O/L Revised
RevisedO/L
O/L
O/L
O/LAdvice
Advice
Four
FourQtly
Qtly
Four
FourQtly
QtlyA/c
A/c Run
Run offA/c
off A/c
Reinsurers
U/W 2004 PC
PCCalculation
Calculation Revised
RevisedPC
PC
Continue
O/L Revised
RevisedO/L
O/LAdvice
Advice O/L
6 12 18 24 71
U/W Year Method (run off)

2002 2003 2004

J F MA MJ J A S O N D J F MA MJ J A S O N D J F MA MJ J A S O N D
J
F
M
A
M
J
J Policy Incepts
A
S
O
N
D

72
SOA for Run Off Treaty
Credited to Reinsurers
o Premiums net of returns and
cancellations.
o PR Released.
o LR Released.
o Interest on Reserves.
o Refund on Cash Loss
Debited to Reinsurers
o Ceding Commission.
o Tax on Premium.
o PR retained.
o LR retained.
o Paid Claims.
o Profit Commission (annual)
73
Why Clean Cut A/c System?
Administrative costs for handling accounts are very
high.
Large treaties are placed with a number of
reinsurers, hence more administration.
Reinsurers may change their shares or cancel
participation, hence Cedant may be required to
allocate Premium, Deductions, Claims & other
accounting items to many different reinsurers, until
the liability is finally expired.
The concept of Portfolios was introduced to assist
both Ceding Company and the Reinsurer in
reduction of administrative expenses.
74
Portfolios

The period of reinsurance treaty does not correspond

to the period of all original direct insurances.
Most of the policies will be still in force at the end of
the reinsurance period and for which the reinsurer
would have received full premium.
For example, if the reinsurance period follows the
calendar year, an annual insurance policy issued at 1st
July has at 31st December six months until expiry
during which time a claim might occur.

75
Portfolios

A system has been developed whereby this

unexpired liability can be withdrawn from a
reinsurer canceling its participation and
transferred to (assumed by) a new reinsurer
who will receive a commensurate share of the
premiums.
Thus, losses occurring before the date of
cancellation are charged to the old reinsurer
and losses occurring after the date of
cancellation to the new reinsurer.
76
Portfolios

By the same technique, the liability in

respect of losses that have not been settled
at the time of the change in reinsurers
participation on the treaty will be
transferred to the new reinsurer together
with the corresponding claims reserve.
The old reinsurer will no longer be charged
with claims that were outstanding at the
date of cancellation.

77
Portfolios

This transfer of liability between old and new

reinsurers when a change in participations
takes place are effected as soon as possible
after the end of the reinsurance period and are
handled by way of a:
premium and loss portfolio transfer account.
35% of accounted premium during the year

90% or 100% of losses outstanding at the end of

the year

78
A/c Year Method (Clean Cut)
Brings into one revenue year all Premiums
(less commissions and deductions) less
claims payable, reported by the Cedant
during that revenue year regardless the
underwriting year to which the item relates.
Best suited for short tail class of business
such as Fire & Accident where both
Premiums and Claims are settled faster.

79
A/c Year Method (Clean Cut)
At the end of the year, the liability of Reinsurers is CUT by
P/F premium & loss withdrawal and at the beginning of
the nest year, the same liability is passed on to the
U/W Reinsurers of next year, by P/F premium and loss entry.

2002 A B C D

2003 B C E F

2004 C E F G

2005 C E G

2006 E G 80
A/c Year Method (Clean Cut)

2002 2003

J F M A M J J A S O N D J F M A M J J A S O N D
J
F
M
A
M
J
J
A
S
O
N
D

81
A/c Year Method (Clean Cut) format:

Credit Debit
Premium Ceded Commission
Portfolio Premium Overriding

Entry Commission
Portfolio Loss entry Claims Paid

PR Release Premium P/F

Loss Reserve
withdrawal
Loss P/F withdrawal
Release
PR Retained
Interest (Less Tax) on
LR Retained
Reserve Release
Credit for Cash Loss Taxes and Charged

Balance: Difference between Credit and Debit

82
 Portfolio Premiums
At the end of an U/W year, there are a number of unexpired policies. The liability of
current Reinsurers is transferred to the next reinsurers through P/F Premium and Loss
Transfers. P/F Premiums are usually calculated @ 35% or 40% of accounted premium
during the year.
1.1.1998 31.12.1998
Earned
Earned
Premium Unearned
Unearned
Premium Premium
Reinsurer A Premium
outgoing
P/F
P/FPremium
Premium
Withdrawn
Withdrawn
1.1.1999 31.12.1999
P/F Earned
Reinsurer B P/FPremium
Premium Earned
Premium
Unearned
Unearned
incoming Assumed
Assumed Premium Premium
Premium

P/F
P/FPremium
Premium
Withdrawn
Withdrawn
1.1.2000 31.12.2000
P/F Earned
Reinsurer C P/FPremium
Premium Earned
Premium
Unearned
Unearned
incoming Assumed Premium Premium
Assumed Premium
83
 Portfolio Losses
This means, at the end of the treaty year, the outstanding losses are
withdrawn by the Ceding Company and credit is given to the
incoming reinsurers.
1.1.1998 31.12.1998
Outstanding
Paid Losses
Reinsurer A Losses
outgoing
P/F Loss
Withdrawn
1.1.1999 31.12.1999

Reinsurer B P/F Loss Outstanding

Paid Losses
incoming Entry Losses

P/F Loss
Withdrawn
1.1.2000 31.12.2000

Reinsurer C P/F Loss Outstanding

Paid Losses
incoming Entry Losses
84
A/c Year Method (Clean Cut)
2002 2003 2004

J F MA MJ J A S O N D J F MA MJ J A S O N D J F MA MJ J A S O N D
J
F
M
A
M
J
J Policy Incepts
A
S
O
N
D

85
SOA for Clean Cut Treaty
Credited to Reinsurers
o Premiums net of returns and
cancellations.
o PR Released.
o LR Released.
o Interest on Reserves.
o P P/F incoming.
o L P/F incoming.
o Refund on Cash Loss
Debited to Reinsurers
o Ceding Commission.
o Tax on Premium.
o PR retained.
o LR retained.
o Paid Claims.
o P P/F Withdrawal.
o L P/F Withdrawal.
o Profit Commission.
86
 Loss Participation Clause
Reinsured shall reimburse to the Reinsurer 40% of the loss ratio
exceeding 75% up to 100%.
Loss Ratio = % of Incurred Claims to Earned Premium.
Example 1

Incurred Claim 52,000 & Earned Premium 50,000 LR = 104%

Maximum loss participation by Reinsured is 40% of 25% i.e.5,000.
Example 2

Incurred Claim 30,000 & Earned Premium 50,000 LR = 60%

Since LR is below 75% the Loss Participation Clause not
applicable.
Example 3

Incurred Claim 45,000 & Earned Premium is 50,000 LR = 90%

Reinsured will participate 40% of 15% LR ( 90% - 75%) i.e. 3,000

87
Commutation

This is early termination of a contract of

reinsurance in return for mutually agreed
level of consideration.
Relieves reinsurer of his obligation.
Any losses to the contract, after the
commutation will be solely and totally
borne by the reinsured.

88
Commutation

For example, on a Marine Hull Surplus

Treaty U/W Yr 2000, there was a large
claim advised but not paid until 2009.
The 100% Reserves are say 10 m.
The reinsurer has to provide for this
reserve every year. This costs him
administration cost + affects his results.
Hence the commutation will be proposed
for say 7.5 m settlement.
89
Premium Reserves (PR)

Originally meant to be a security against

Reinsurers obligation under treaty.
Also legislative requirement in certain
Countries.
PR are reserves retained at pre-fixed % rate
(35 to 40)on Gross Premium of each
quarterly / half-yearly account and released in
corresponding account next year.
Interest is paid, at prescribed rate less IT.

90
Premium Reserves

In reciprocal trading PR are waived, if so

desired by both the sides.
Non Reciprocal treaties waiving of
reserves is favoured for Cash Flow
underwriting.
Some times in a clean cu treaty P/F
Premium entry is retained as PR and is
released in each quarter, thus at the end
of the year it is squared off.
91
Loss Reserves (LR)

Same purpose as PR i.e. security

against non performance of reinsurer.
Cover those losses, which have
occurred but not paid.
Usually 90% of O/S losses
Some times include IBNR loading.
Interest is paid.

92
Loss Reserves
This is the consideration for
Outstanding Loss liability and include
Outstanding Losses + IBNR.
LR are usually 90% or 100% of
Outstanding Loss + IBNR.
They are retained and released
quarterly or annually as per the
provisions of the treaty terms.

93
Example of PR & LR
Retained & Released (1)
Based on 40% PR & 100% LR & 4% Interest
Year 1 Debit Credit
st
1 Qtr Premium 100,000
PR retained 40,000
nd
2 Qtr Premium 120,000
PR retained 48,000
rd
3 Qtr Premium 90,000
PR retained 36,000
th
4 Qtr Premium 60,000
PR retained 24,000
LR retained 23,000

94
Example of PR & LR Retained & Released (2)
Based on 40% PR & 100% LR & 4% Interest
Year 2 Debit Credit
th
5 Qtr Premium 50,000
PR retained 20,000
PR released 40,000
Interest 1,600
th
6 Qtr Premium 10,000
PR retained 4,000
PR released 48,000
Interest 1,920
th
7 Qtr Premium Refund 1,000
PR retained 400
PR released 36,000
Interest 1,440
th
8 Qtr Premium 200
PR retained 80
PR released 24,000
LR released 23,000
Interest 1,880
LR retained 12,000
95
Various Reserves
Strengthen Solvency of an Insurer

A = Paid Up Capital
B = Free Reserves
C = Premium Reserves
A D = Loss Reserves
E = Cat or Disaster Reserves

B
C
D
E
96
Unearned Premium Reserve

Despite resistance from reinsurers, it is common for

ceding companies to retain a proportion of premium
payable to the reinsurer. The motivation is normally
that this deposit should serve as a guarantee against
the failure of the reinsurer to meet its future liabilities.
In some countries, the law requires this.
The calculation of premium reserves withheld should,
theoretically, follow the same principle as that of
portfolio premium. In practice, however, and for ease
of administration, premium reserves are calculated at
a fixed percentage of premiums. Very often the rate is
40%.

97
Methods of unearned Premium
Prorata Premium for EVERY POLICY
To be calculated by determining the
proportion of each policy that extends
beyond the treaty year.
For example: Policy Premium is 25,000 &
period is 2nd May to 1st May
Unearned Period 1st Jan to 2nd May i.e. 121

days
121/365 X 25,000 = 8287.67

Administratively cumbersome & expensive

98
Methods of unearned Premium
1/24th System.
Based on following assumptions:
Average policy ceded in any monthly period incepts in
the middle of each month.
Average policy period is 12 months.

Therefore for the month of January 15 days of

policy premium remains unearned i.e. 1/24th
For the month of February 45 days of policy
premium remains unearned i.e. 3/24th.

99
1/24th Method
J FMAM J J A S OND J FMAM J J A S OND Relatively accurate.
1/24th Ideally suited, where
3/24th spread of policies
5/24th ceded is unbalanced.
7/24th
9/24th
11/24th
13/24th
15/24th
17/24th
19/24th
21/24th
23/24th

100
Methods of unearned Premium
1/8thSystem, is similar to 1/24th System. Only
the Assumptions are different:
Average policy incepts in the middle of each
quarterly period and expires in the middle of each
quarterly period of the next year.
Therefore for the 1st quarter, quarter of premium
remains unearned at the end of the treaty year i.e.
1/8th; for the 2nd Quarter 1 quarter of premium
remains unearned i.e. 3/8th.
This method is also reasonably accurate & simple
to calculate.
Depends on average policy period of 12 months.

101
1/8th Method
Treaty Year 1 Treaty Year 2
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1/8th

3/8th
5/8th

7/8th

102
Methods of unearned Premium
Flatpercentage basis i.e 35% to 40%
system
Least accurate of all systems.
35% to 40% of annual premium is
withdrawn.
Unless policies are well balanced, this
system will work against the interests of
either party.
Most commonly used method, as simple
and easy to operate.

103
Chain of Proportional Treaty A/c

Preparation of Premium & Claims Bordereaux

Loss Notifications
Cash Claim Advice
Rendering and settlement of A/c Q or H/Y
If S/s commission, adjustment at the end of the year
Submission of P/F withdrawal and entry for clean cut
treaties.
Submission of Premium & Loss Reserves and release
statements.
Submission of P/C statement.
Advise of O/S loss at the end of the treaty

104
105