The Institute of Finance

Management (IFM)
Department of Insurance
Subject Code:IRU-08610
:
Subject Name

REINSURANCE
PREPARED BY;
MR. MLAPONI, S
 Contents
❑ Definition& Concepts
❑ Reinsurance Premium
❑ Non-proportional premiums
❑ Minimum and Deposit Premium
❑ Adjustment Premium
❑ Reinstatement Premium
❑ Rating of Non-proportional treaties
❑ Burning Cost/Experience Rating Method
❑ Exposure rating methods
❑ Q&A Session
PRICING OF NON-PROPORTIONAL TREATIES
➢ Every insurer & reinsurer is keen to know the correct
price to charge for the cover they are providing.
➢ Premiums is the price of purchasing (consideration)
insurance protection by the proposer from an insurance
company.
➢ Reinsurance premium is the price of the cover charged
by the reinsurer in consideration for offering to
underwrite the risk.
➢ Thepremium is a reflection of the original insurer’s risk
passed to the reinsurer.
PRICING OF NON-PROPORTIONAL TREATIES
The premium base be can be defined in a number of
ways;
 GrossWritten Premium (GWP)- This is the total premiums
on insurance underwritten by an insurer during a
period, before deducting any outward reinsurance
premiums. They are premiums payable by the policy
holder as the price of insurance protection during a
given period e.g. for a calendar year.
PRICING OF NON-PROPORTIONAL TREATIES
 Net
premiums :– Net premiums can be understood to
mean:-
➢ Gross
premiums less premiums ceded e.g. reinsurance
premiums or
➢ Reinsurancepremiums less reinsurance commissions
and any taxes, e.g. fire brigade taxes etc.
➢ Writtenpremiums:- This is the overall premium amount
owing to the insurance company for the period of a
policy up to its termination or renewal date.
PRICING OF NON-PROPORTIONAL TREATIES
 Paid premiums:- These are premiums that the policy holder
has actually paid to the insurance company during the
given policy period.
 Earned premiums:- Earned premiums are calculated for a
particular period, as a rule one year. They consist of:-
➢ The written premiums of the year in question
➢ Less those parts of the premiums with which the insured has
purchased coverage for a period over and above a given
year (unearned premiums for the current year).
➢ Plus premiums written in previous years, but not earned until
the year in question (unearned premiums brought forward
from previous years).
PRICING OF NON-PROPORTIONAL TREATIES
 Gross Net Earned Premium Income (GNEPI)- represents
the earned premiums of the reinsured company during
the period for the lines of business covered, net (after
cancellations, refunds, and premiums paid for
reinsurance protection).
 GrossEarned Premium Income (GEPI) :- Gross earned
premium income less any policy cancellations and
outward reinsurance premiums but inclusive of
commissions and expenses.
PRICING OF NON-PROPORTIONAL TREATIES
PREMIUMS:-
The premiums consist of several components:-
1. Pure Risk Premium- the premium necessary to cover the
anticipated loss.
2. A safety margin-for the risk spread and for any possible excess
loss.
3. A loading to cover the administrative costs and
4. A profit loading to cover return on equity.
PRICING OF NON-PROPORTIONAL TREATIES
The quality of the rate obtained will depend on:
 The quality and quantity of information available on
the risk, and the cover required.
 The care taken in analyzing the risk.
 The care taken in analyzing the information.
 The credibility of the experience rating.
▪ The market cycle: soft market conditions, hard etc.
▪ Company’s strategy- growth or consolidation etc
▪ New risks or renewal.
NON-PROPORTIONAL PREMIUMS
➢ There are three types of premiums involved in Non-
Proportional treaties i.e Minimum and Deposit
premiums, Adjustment Premiums and Reinstatement
Premiums.
➢ Minimum and Deposit Premiums (MDP's): The
Reinsurance Premium charged for a non-proportional
treaty is obtained by applying a percentage rate on
the “Gross net Premium Income (GNPI)" for example, if
the gross net premium income is TZS 1bn and the rate
is 5%, The reinsurance premium will be = 5%*TZS 1bn=
TZS 50m
MINIMUM AND DEPOSIT PREMIUMS
➢ The Reinsured cannot know for certain how much
premium he will write in any given year for any given
class of business.
➢ So when calculating the price for a non-prop treaty at
the beginning of the year, the Reinsured will provide
the Reinsurer with an Estimate of the Expected Net
Premium Income.
➢ This estimate is known as the Estimated Gross Net
Premium Income (EGNPI). It's on this that the
applicable rate determined by the Reinsurer will be
applied to come up with the Minimum Premium.
MINIMUM AND DEPOSIT PREMIUMS
➢ Minimum because its the least premium that the
Reinsurer will accept in return for the protection
he will provide.
➢ Reinsurers will expect to receive this premium in
advance at the start of the reinsurance period to
enable them invest it hence the Deposit.
➢ The Premium therefore paid by the reinsured to
the Excess of Loss Reinsurer at the start of the
Reinsurance Period in advance is called the
Minimum and Deposit Premium.
ADJUSTMENT PREMIUMS
➢ Adjustment Premiums (AP): At the end of the
reinsurance period, the Reinsurer will able to ascertain
how much premium he has written.
➢ Since the Minimum and Deposit premiums collected
at the beginning of the year are based on estimates,
the Reinsurer needs to ascertain the actual premiums
to be collected from the reinsured
➢ The Actual XL premium will be calculated by applying
the rate on the GNPI. The Adjustment Premium is then
determined by getting the difference between MDP’s
and the Actual XL premium.
ADJUSTMENT PREMIUMS
➢ Ifthe Actual Premium is greater than the MDP,
then the Reinsured will pay an additional premium
to the Reinsurer.
➢ However if the Actual Premium is less than the
MDP, the Reinsurer will NOT refund the difference
as the MDP’s agreed at the beginning of the year
were the minimum premiums.
REINSTATEMENT PREMIUMS
➢ When an Excess of Loss treaty pays for a claim, the
amount of cover provided by the treaty reduces by the
amount of the claim.
➢ This leaves the reinsured operating with insufficient
protection.
➢ By paying what is known as a "Reinstatement Premium“.
➢ Reinsured will be able to reinstate its cover back to cover
limit automatically at the time of settling a claim. And the
cover is reinstated from the date of loss to the expiry of
the treaty.
➢ Reinstatement Premiums are calculated on either
“prorata as to amount” or “prorata as to time”.
THE RATING PROCESS
• Rating or pricing of risk entails the process of
determining adequate or commensurate
premiums to charge for a risk being brought to
the pool.
• This rate will be applied on the Gross Net Premium
Income (GNPI)
The methods used for rating are:
▪ Experience rating/Burning Cost Method;
▪ Exposure rating method;
▪ Probability method
BURNING COST/EXPERIENCE METHOD
➢ This is simplest rating method use to price excess of loss
treaties.
➢ It rely on the use of past information
(Losses/Experience) of the reinsured in its pricing
model.
➢ The claims data of minimum 5 years will be used to
provide accurate rate.
➢ The reinsurer will use this data to compare the
premiums for each of those years against the claims
the Reinsurer would have paid if the current excess of
loss program sought had been in place for those 5
years.
BURNING COST/EXPERIENCE METHOD
➢ In obtaining the burning cost, the Reinsurer first
determines the technical rate also known as the pure
burning cost (PBC).
PBC= Total Losses in Charge to the layer for n years/Total
GNPI for n years.
➢ After determining the PBC, the Reinsurer loads this rate
to take care of his costs and desired return/profit.
➢ The loading factors are usually expressed as ratios e.g
100/80, 100/72 etc.
➢ This final rate also the commercial rate is what the
Reinsurer will charge the Reinsured to determine the
reinsurance premium.
BURNING COST/EXPERIENCE METHOD
➢ Example:
➢ ABC Insurance company purchase an excess of
loss for its motor portfolio using an excess of loss
treaty of TZS 350,000,000 in excess of TZS
50,000,000 Year GNPI (TZS) Total Claims FGU (TZS)
2018 Loss 1- 100m 700m
Loss 2- 150m
2019 Loss 1- 200m 1bn
Loss 2- 300m
2020 Loss 1- 200m 1.5bn
Loss 2- 400m
2021 Loss 1- 200m 800m
2022 Loss 1- 100m 2bn
Loss 2- 200m
Loss 3- 100m
Total 6bn
BURNING COST/EXPERIENCE METHOD
➢ Example Continue….
➢ The reinsurer wish to load 100/80 for the obtained
rate.
➢ If the EGNPI for the year 2023 is TZS 2,500,000,000.
➢ Determine the pure burning cost rate.
➢ Determine commercial rate and a minimum and
deposit premium to be paid.
BURNING COST/EXPERIENCE METHOD
➢ Example 2.
BURNING COST/EXPERIENCE METHOD
➢ On determining the commercial rate, the Reinsurer
can then determine the sliding scale i.e the minimum
and maximum rates that will guide him when making
adjustments at the end of the year.
➢ The use of a sliding scale protects both the interests of
the Reinsurer and the Reinsured.
➢ If the Burning cost turns out to be less than the
minimum premium, the Reinsurer is guaranteed the
minimum rate, while if the burning cost turns out to be
greater than the maximum rate, then the Reinsured is
guaranteed of the maximum rate as per the scale.
BURNING COST/EXPERIENCE METHOD
➢ Example 3.
➢ ABC insurance company purchases and excess of
loss treaty of 5,000,000 Xs 500,000 for its fire line of
business for the period 01/01/2017 to 31/12/2017.
The Adjustment Rate is 3.5% ABC expects to write
(EGNPI) 1,500,000 during 2017.
➢ At the end of the year 2017, ABC’s Actual Gross
Net Premium Income is (GNPI) 2,000,000.00
EXPOSURE RATING METHOD
➢ This method does not rely on the use of loss
experience, Reinsurers use instead what is known as a
risk (portfolio) profile of the reinsured's risks and an
industry/market exposure curve.
➢ The exposure curve is usually generated from the
industry/market losses obtained from market surveys
carried out or data collected from the industry over a
period of time.
➢ In the risk profile table, reinsured's risks for the class of
business to be protected are classified into bands. For
each band of risk, we have the number of policies in
that band, the total premium for the given band.
LLOYD’S FIRST LOSS SCALE
SAMPLE RISK PROFILE
EXPOSURE RATING METHOD

 Usingthe exposure curve reinsurers come up with the

technical rate to be charged so as to determine the
excess of loss premium.
 Theobjective of exposure rating is to ensure that there is
a correct distribution of premiums between the Excess of
Loss reinsurers and the reinsured in terms of the level of
exposures of the account as reflected by the risk profile.
 Such
rating revolves around an assessment of exposure
above and below the chosen deductible.
 The method is used where there is no past experience.
EXPOSURE RATING METHOD
➢ Example:
➢ Suppose ABC Insurance Company wishes to protect its fire portfolio using an excess of loss
treaty of say 100,000.00 Xs 10,000.00. If the risk profile for ABC insurance company’s fire
business is as per the risk profile table below.
➢ Loading factor 100/80.
S/N Risk Band No. of Policies Risk Premium

1 0-5,000 100 2,500

2 5,001-10,000 60 7,500

3 10,001-15,000 35 12,500.50

4 15,001-20,000 15 17,500.50

210 40,001.50
Any Question?