NON PROPORTIONAL

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.

The status of ceding company is not that of the reinsured. He does

not cede the risk and proportional premium. He seeks protection
to mitigate the loss beyond his chosen limit of loss retention
 
• The ceding company decides the maximum amount of loss that
it is prepared to bear for its own net account on any single
claim or claims arising from one event.
• This amount becomes the 'underlying retention' or 'underlying
limit' of the treaty.
• If the ultimate net loss (also some times referred as ground up
loss) of the ceding company exceeds this underlying limit, then
the reinsurers pay the excess subject to a maximum figure
which is the 'overlying' or 'upper' limit of the cover under the
treaty.

 
 
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

 There are two common forms of Excess of Loss Treaty

(i) Working(Risk) Cover or Per Risk Cover

(ii) Catastrophe or Per Event Cover

 
.

 
 
 
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

 Direct insurer (Retention 2 crores) Loss is 1 crore

 WXL Reinsurer = Zero because(Retention 2.0 crores ) (The 2 crores deductible was not
exceeded.)
 CatXL Reinsurer= Zero (Retention 4 crores) (The 4 crores deductible was not exceeded.)
 Loss event 2:
A major fire leaves the direct insurer with a loss of 7 crores for his own account
Distribution of losses
 Direct insure = 2 crores (Retention of WXL)
 WXL Reinsurer = 5 crores (7 crores less 2 crores),so he can bear loss up to 6.0
crores.
 CatXL Reinsurer= Zero
  Loss event 3:
An earthquake leaves the direct insurer with losses for his own account as
follows:
Risk A: 1 crore
Risk B: 1 crore
Risk C: 1 crore
Risk D: 2 crores
Risk E: 4 crores
Total of five risk events : 9 crores
 Recovery under WXL

Risk Loss Own Retention Recovery Recovery

(2 crore) WXL CAT XL

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.

In such circumstances, to limit such loss ratio to an

agreed percentage, a stop loss cover is advisable.
This cover is known by name Per Portfolio Cover or
Excess-of Loss Ratio Cover.
 
 
8/5/2019 Non Proportional treaties 11
 How stop loss treaties operates

• Stop Loss Treaty operates in respect of the annual loss ratio

incurred and not in respect of any fixed amount of the
underlying retention.
• The treaty is arranged to cover, say, 75% of all losses in excess
of a loss ratio, of say, 90% upto and including a loss ratio of
say, 110%.
• The reinsurer's liability arises when the loss ratio exceeds the
agreed percentage.
• Normally reinsurer's liability is limited to a maximum amount,
in addition to the percentage limit because of the fact that if
there is substantial increase in the premium income of the
ceding company, reinsurer's liability can increase.
8/5/2019 Non Proportional treaties 12
• Illustration - ABC insurance Co. had arranged a Stop
Loss Cover for 90 % of all losses in excess of a loss
ratio of 60% until the loss ratio of the company
reaches 120% further subject to maximum 90% of Rs
2 crores.
• The premium income of the company was Rs. 100
crores and the losses were Rs. 62.5 crores.
• Calculate the amount of recovery of losses from the
reinsurance.

8/5/2019 Non Proportional treaties 13

 Solution:
Here in addition to the percentage limit, reinsurer's
liability is limited to a maximum amount of Rs. 1.80
crores (90% of Rs 2 crores = 1.80 ).
(1)60% Loss Amount (Rs. 100 crores x 60%)=60 Crores.

(2)Losses in excess of 60%= Rs.62.5 crores - Rs.60

crores = Rs. 2.5 crores

(3)Recovery from Reinsurance

= 90% of Rs. 2.5 crore i.e. Rs.2.25 crores subject to
maximum Rs. 1.80 crores.
 
8/5/2019 Non Proportional treaties 14
 BUFFER EXCESS OF LOSS COVER
 (AGGREGATE EXCESS OF LOSS REINSURANCE)
.
• This is also known as Excess of Loss Cover with
Aggregate Deductible.
• As earlier explained deductible under Excess of Loss
Cover is the loss amount which the ceding company
bears for its own account and in excess of which the
reinsurers become liable to pay.
• Under buffer excess of loss cover the ceding
company agrees to bear in addition to this
deductible.

8/5/2019 Non Proportional treaties 15

 Illustration
• A XL cover provides to pay in excess of Rs. 2,00,000 per event up to
a further Rs. 7,00,000 per event.
• Ceding company to retain in the aggregate the first Rs.2,00,000 of
losses which otherwise recoverable under the cover. Calculate
reinsurer's liability on following losses:
Claim I Rs. 2,50,000
Claim II Rs. 3,00,000
Claim III Rs. 5,00,000
 
Solution - Loss upto Rs. 2 lacs(Deductible) shall be borne by the
ceding company.
• In addition to this the ceding company has to retain in the aggregate
the first Rs. 2,00,000 of losses which otherwise recoverable. Thus:
8/5/2019 Non Proportional treaties 16
In below mentioned example first and second column reinsurers
libility is nil.
However in liability (5.0Lac claim 3.0 is in excess of the ceding
company retention.)
As the buffer liability is maximum of 2.0 and 1,50,000 already
came from claim No 1 and 2,the it can take only balance 50,000
only. Therefore remaining 2,50,000 lac will be the reinsurers
liability.
Claim Loss Excess over Tran to Aggregate Reinsurer's
2,00,00 Deductible Liability

2,50,000 50,000 50,000 ----

3,00,000 1,00,000 1,00,000 -----

5,00,000 3,00,000 50,000 2,50,000

8/5/2019 Non Proportional treaties 17

 Umbrella XL Covers

• This cover protect reinsured against losses even

beyond the recovery of losses under specific excess
of loss covers protecting a particular department or
portfolio.
• An umbrella cover or whole account cover can be
organized to protect accumulations of net loss from a
number of classes of business but arising from one
event, after the operation of all specific reinsurances
in the separate departments.
8/5/2019 Non Proportional treaties 18
 Example
• Hindustan General Insurance Company underwrites all types of
non-life policies.
• Company’s Fire, Marine and Motor Policies inter alia cover the peril
of flood. The company has following reinsurance arrangements:
• 70% Marine Quota Share Treaty
• 10 Line Fire Surplus Treaty – Company’s Retention is $ 5m
• Motor Own-damage WXL/R 5m in excess of 1m
• Umbrella Cover for Fire, Marine and Motor Portfolios Flood Risk -
10m in excess of 10m
• Arising out of a single incident of flood, company has paid following
losses:

8/5/2019 Non Proportional treaties 19

 Risk Sum Loss
Insured
Marine Portfolio
Risk A 50m 2m
Risk B 60m 3m
Risk C 70m 4m
Total 9m
Fire Portfolio
Risk O 20m 16m
Risk P 25m 20m
Risk Q 50m 10m
Total 46m
Motor Portfolio
Risk Z 4m 3m

Recovery under Umbrella Cover for losses

which fell on the company after utilizing
treaties for respective portfolios.
8/5/2019 Non Proportional treaties 20
 1. 70% Marine Quota Share Treaty – Loss 9m
Reinsurer to pay 6.3m
  2. 10 Line Fire Surplus Treaty – Company’s Retention is $ 5m

Risk Sum Insured Retention Cession Proportion Los Recovery

s
Risk O 20m 5m 15m 25% - 75% 16m 12m
Risk P 25m 5m 20m 20% - 80% 20m 16m
Risk Q 50m 5m 45m 10% - 90% 10m 09m
3. Motor Own-damage WXL/R Total
5.0 m in excess of 1m 46m 37m
Loss 3.0 m less deductible 1m = Recovery 2

Total Losses Un-Recovered before Umbrella XL for flood Risk

Portfolio Loss Recovery Unrecovere
d
Marine 9m 6.3m 2.7m
Fire 46m 37m 09m
Motor 3m 2m 1.0 m
Total 58m 45.3m 12.7m

8/5/2019 Non Proportional treaties 21

• Umbrella Cover for Fire, Marine and Motor
Portfolios Flood Risk – 10.0m in excess of
10.0m
• Loss Recoverable before Umbrella Cover is -
12.7m
• Less Deductible 10.0m
• Recovery Umbrella Cover 2.7 m

8/5/2019 Non Proportional treaties 22

 THANK YOU

8/5/2019 Non Proportional treaties 23