allocating ri costs
Its worth noting that non-proportional reinsurance treaties typically have some exposure related adjustment feature, so the total cost of the reinsurance treaty to the reinsured will be adjusted, usually on expiry, to reflect the original under- or over- estimation of exposure on which the treaty was originally priced. Usually this is just done by making the ri premium a % of insurers GWP (so usuing premium as a proxy for exposure).
Usually this is acheived by agreeing a deposit premium, with an adjustable rate (of GWP) on which the treaty is adjusted at expiry. However, a minimum premium is often included, so if the insurer significantly overestimates its income, it will be left 'holding the baby' so to speak, as you said.
On your main point, whilst in theory this should happen (i.e. allocation of NP RI costs back to individual policies), i'm not sure it often happens in practice. In theory, for a risk xl, I would propose that the insurer should calculate the proportion of expected losses to an ri treaty that an individual policy would make up, and allocate the policy the same proportion of ri costs. (Or perhaps take a marginal approach in considering new policies). However, this is likely to be impractical for all but the largest of policies, so presumably a more broad brush approach is typically taken. But it wouldn't really make sense to allocate costs equally amongst all policies, as you seemed to be suggesting. Allocation in proportion to GWP would make sense for a cat xl, or agg xl treaty, but not for a risk xl - since for example, policies with limits below the NP RI retention will not expose the RI treaty at all, so should not be allocated any of the risk xl costs. (For risk xl treaties a reinsurer is less likely to use GWP as a proxy for exposure, but may still do so on the assumption that the line size profile of the insurer's business will remain fairly constant).
Last edited by a moderator: Apr 11, 2011