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Professional Indemnity Reinsurance
12 September 2001
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1.1 Contents
1 Introduction
2 Characteristics of PI
3 Basic Functions and Forms of Reinsurance
4 XL Reinsurance
5 Pro Rata Reinsurance
6 Pro Rata v XL
7 Stop Loss
8 General Comments
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1.2 Two Fundamental Assumptions
In the medium/long-term:
1 Original business is profitable
2 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
D&O
W&I
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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3 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
Event Per insured 1m
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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
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
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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