Proportional reinsurance, Reinsurance of excess of...

9.2. Proportional reinsurance

Proportional reinsurance is the simplest and most common way to distribute obligations of parties in reinsurance relations. The peculiarity of proportional reinsurance consists in the fact that the insurer and the reinsurer distribute insurance liability and, consequently, the insurance premium and insurance indemnity in a certain proportion. The proportion of premium distribution and reimbursement depends on the ratio of the liability of the insurer and reinsurer.

The size of the reinsurer's remuneration is calculated as the share of the insurance premium due to him transferred under reinsurance contracts minus the reinsurance commission. The reinsurance commission is a reinsurer's fee to the direct insurer for contracts provided for reinsurance, intended to compensate the insurer for part of the costs incurred by him for conducting business.

There are the following varieties of proportional reinsurance:

- quota reinsurance;

- reinsurance of excess of amounts;

- quota-excessive reinsurance.

Quota reinsurance. The peculiarity of quota reinsurance is that the reinsurer participates in a certain quota in any risk accepted by the primary insurer, regardless of the amount of the insured amount. A quota can be called a share and is denoted as a percentage of the magnitude of the risk. In the same proportion as the risk, the reinsurer receives an insurance premium, and the reinsurer reimburses the insurer for all losses paid by him under the original insurance contract.

The quota contract is the simplest from a technical point of view and is used for reinsuring small and medium losses (for example, insurance of civil liability of motor vehicle owners or auto hull), as well as reinsurance of new types of risks for which there are no loss statistics for several years.

Example

Suppose, three insurance contracts were concluded for the amounts of 250 thousand, 600 thousand and 980 thousand rubles. The value of own retention is 35%, and 65% is transferred to reinsurance. Thus, the risk distribution will be:

 Insurer's share Reinsurer's share 250 thousand rubles. · 35% = 87,5 thousand rubles. 250 thousand rubles. · 65% = 162,5 thousand rubles. 600 thousand rubles. · 35% = 210 thousand rubles. 600 thousand rubles. · 65% = 390 thousand rubles. 980 thousand rubles. · 35% = 343 thousand rubles. 980 thousand rubles. · 65% = 637 thousand rubles.

Let's assume that the loss under the first contract was 145 thousand rubles, in the second - 420 thousand rubles. and on the third - 980 thousand rubles. In this case, the distribution of the loss is:

 Insurer's share Reinsurer's share 145 thousand rubles. · 35% = 50.75 thousand rubles 145 thousand rubles. · 65% = 94.25 thousand rubles. 420 thousand rubles. · 35% = 147 thousand rubles. 420 thousand rubles. · 65% = 273 thousand rubles. 980 thousand rubles. · 35% = 343 thousand rubles. 980 thousand rubles. · 65% = 637 thousand rubles.

Reinsurance of excess of amounts

The excident is the excess over the agreed amount of the insurer's own deduction. Own retention is expressed in a fixed absolute value. It is the excess over a given quantity that is the object of reinsurance of the excess of sums. The insurer's own deduction is determined in absolute amount as part of the insured amount for the accepted risk or group of risks. Usually, under obligatory reinsurance, the value of the insurer's own deduction is taken equal to one line. The limit of liability of the reinsurer (contract limit), as a rule, in the stipulated number of times (lines) exceeds the amount of the insurer's own deduction.

Example

The insurance has taken a risk with an insured amount of 750 thousand rubles. The amount of own deduction of the insurer is 100 thousand rubles. (one line). The limit of the reinsurance contract for excess amounts is four lines. Accordingly, the limit of liability of the reinsurer under the reinsurance contract of the excess amount is 400 thousand rubles. Excess of the liability limit of the reinsurer is 250 thousand rubles. and can be reinsured optionally or left on its own withholding of the reinsurer.

When concluding a reinsurance contract for excess amounts, those risks whose value is less than or equal to the amount of the insurer's own deduction are not considered. The reinsurer can leave small risks on his own withholding, and transfer the large and dangerous reinsurers to the reinsurer. To reduce the risk of a reinsurer, the limit of liability of a reinsurer is established, and all risks that exceed this liability limit can be left on the insurer's own deduction or reinsured optionally or under the so-called second sum ex-sum contract. Reinsurance based on excess amounts can be used in cases when the risks accepted for insurance differ sharply in magnitude from each other.

Example

Suppose, three insurance contracts were concluded for the amounts of 250 thousand, 600 thousand and 980 thousand rubles. The amount of one's own retention for each contract is 200 thousand rubles. The limit of the reinsurance contract is 1000 thousand rubles. in excess of 200 thousand rubles. Payments of the reinsurer are carried out at the expense of the limit determined by the contract.

The distribution of risk under contracts will be:

 Insurer's share % Reinsurer's share % 200 thousand rubles. 80 250 - 200 = 50 thousand rubles. 20 200 thousand rubles. 33.33 600 - 200 = 400 thousand rubles. 60.67 200 thousand rubles. 20.41 980 - 200 = 780 thousand rubles. 79.59

Let's assume that the loss under the first contract was 145 thousand rubles, in the second - 420 thousand rubles. and on the third - 980 thousand rubles. In this case, the distribution of the loss is:

 Insurer's share Reinsurer's share 145 thousand rubles. o 80% = 116 thousand rubles. 145 thousand rubles. o 20% = 29 thousand rubles. 420 thousand rubles-33.33% = = 139.986 thousand rubles. 420 thousand rubles. o 60.67% = = 280.014 thousand rubles. 200 thousand rubles. 780 thousand rubles.

Quota-Excessive Reinsurance

This form of proportional reinsurance is a combination of the two discussed above. It allows you to balance the insurance company's portfolio in the best way, since the reinsurer can enter into a reinsurance contract based on the excess of the amounts with a large deductible (the so-called gross-deduction), and then reinsure the amount of its own deduction by the quota reinsurance method, leaving a certain percentage called net hold). A quota-emergency contract can be used by insurance companies that do not have a significant amount of their own funds, but who want to take on insurance major risks and balance their portfolio consisting of various risks for insured amounts.

Example

A reinsurance contract worth 1,000,000 rubles was signed. The gross-withholding is 250 thousand rubles, the excess is three lines of 250 thousand rubles. Net-hold is 25% of gross-retention (62.5 thousand rubles.). The distribution of liability under the quota reinsurance contract will be:

- gross-deduction = (250 thousand rubles/1000 thousand rubles) · 100% = 25%;

- net hold = 25% · 25% = 6.25% of 100% of the amount of the reinsurance contract

-The total share of liability of reinsurers involved in quota and reinsurance of excess amounts will be 93.75%.

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