Professional Indemnity Reinsurance 12 September 2001

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Professional Indemnity Reinsurance12 September
2001
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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

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.2 Two Fundamental Assumptions

• In the medium/long-term
• Original business is profitable
• Cedants pay for their reinsurance recoveries

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1.3 Approaches 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

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2.0 Characteristics of PI
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2.1 Casualty Reinsurance Spectrum

• Motor
• EL
• PL
• Products
• PI
• DO
• WI
• EIL

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2.2 Nature of Losses

• Systemic
• Large single losses -severity
• Attrition - Frequency
• Complexity
• Long Tail

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2.3 Original Business

• Claims Made
• Each Every Loss/Aggregate
• Costs
• North America
• Wide Variety of Wordings

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2.4 The Market

• Relatively Compact Subscription market
• Highly accumulative on target risks
• Capacity becomes aggregate

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Basic Functions and Forms of Reinsurance

• 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

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4.0 XL Reinsurance
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4.1 Description of Loss

• Reinsured to the sole judge
• Follow original policy wording
• Aggregate Extension Clause
• Letter of intent
• Common Cause
• Event

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4.2 Per Insured Per Event

• LOD/RAD
• Stacking of Accumulations
• Congruity of Cover
• Clash Cover

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4.3 Clash Cover
20m
10m
1m
Event
Per insured
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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

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5.0 Pro Rata
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5.1 General

• Exposure to systematic/attritional losses
• QST/FST or Chute
• Commission
• Profit Commission

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5.2 Features to Consider

• Definition of Retention
• Cession Limit in relation to retention
• Loss Ratio Capacity
• Procedures for written/signed lines

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6 Pro Rata v XL
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6.1 XL

• 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

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6.2 Pro Rata

• Cons
• Leakage of profit
• Adverse cashflow
• Administrative burden

• Pros
• Pay-as-you-use
• Attritional relief
• Transparency
• Reduced risk of Coverage disputes
• Unlimited sideways cover
• Overider and profit commission

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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

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8 General Comments

• Need for long-term security
• Transparency
• Clarity of intention
• Congruity of Cover
• Claims Control/Co-operation
• Event Definitions