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Professional Indemnity Reinsurance 12 September 2001. 1.1 Contents. Introduction Characteristics of PI Basic Functions and Forms of Reinsurance XL Reinsurance Pro Rata Reinsurance Pro Rata v XL Stop Loss General Comments. .2 Two Fundamental Assumptions. In the medium/long-term:
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1.1 Contents • Introduction • Characteristics of PI • Basic Functions and Forms of Reinsurance • XL Reinsurance • Pro Rata Reinsurance • Pro Rata v XL • Stop Loss • General Comments
.2 Two Fundamental Assumptions In the medium/long-term: • Original business is profitable • Cedants pay for their reinsurance recoveries
1.3Approaches to Designing Reinsurance Program • Understand the original business - per risk portfolio • Assess needs and Capabilities of cedent • Program should support original business • Profit maximisation v stable profit stream
2.1 Casualty Reinsurance Spectrum Motor EL PL Products PI D&O W&I EIL
2.2Nature of Losses • Systemic • Large single losses -severity • Attrition - Frequency • Complexity • Long Tail
2.3 Original Business • Claims Made • Each & Every Loss/Aggregate • Costs • North America • Wide Variety of Wordings
2.4 The Market • Relatively Compact Subscription market • Highly accumulative on target risks • Capacity becomes aggregate
Function Capacity Revenue Result Balance Sheet Form Surplus Treaty/Quota Coded Risk XL Top Layer XL Working XL Low Level Clash XL Stop Loss Quota Share High Level XL Stop Loss Basic Functions and Forms of Reinsurance
4.1 Description of Loss • Reinsured to the sole judge • Follow original policy wording • Aggregate Extension Clause • Letter of intent • Common Cause • Event
4.2 Per Insured Per Event • LOD/RAD • Stacking of Accumulations • Congruity of Cover • Clash Cover
4.3 ‘Clash’ Cover 20m 10m 1m Event Per insured
4.4 Features to Consider • Extent of Costs Break - out Cover • Reinstatements / Sideways Cover • Reinstatement Premiums • Back- up Layers • Aggregate Deductibles • Profit Commission/Commutation • Indexation • Breadth of Coverage
5.1 General • Exposure to systematic/attritional losses • QST/FST or ‘ Chute’ • Commission • Profit Commission
5.2 Features to Consider • Definition of Retention • Cession Limit in relation to retention • Loss Ratio Capacity • Procedures for written/signed lines
Pros Premium Retention Administration Cons Retention of attritional claims M & D Premium Definition of Loss Limited Sideways Paid Reinstatements No Commission Not ‘following the fortunes’ 6.1 XL
Pros Pay-as-you-use Attritional relief Transparency Reduced risk of Coverage disputes Unlimited sideways cover Overider and profit commission Cons Leakage of profit Adverse cashflow Administrative burden 6.2 Pro Rata
7 Stop Loss • Result dependent on much as Rating levels as claims activity • Cyclical nature of results • Systematic exposure • Long-tail in relation to revenue/underwriting Year
8 General Comments • Need for long-term security • Transparency • Clarity of intention • Congruity of Cover • Claims Control/Co-operation • Event Definitions
