I dont understand the solution to Question 4.7 which explains why proportional reinsurance is likely to be arranged on a policies-incepting basis An example would help me to understand this. Could you also give me an example as to why it would be unlikely to write the proportional-renisurance on a claim incident or reported basis? Many thanks
How would the reinsurance premium be calculated? I hope this helps and is correct:- Under quota share, the reinsurance premium and claims are proportional to the original (From Ground Up) premium and claims. How would the reinsurance premiums be calculated on a losses occurring during, claims incident or claims made basis and how would these compare to the policies-incepting or risks attaching basis. Finally can you also see how much more difficult it is to calculate a proprotional reinsurance premium on the other bases?
Re I am afraid I still cant get my head round as to why proportional reinsurance would be based on a policies-incepting basis.
I've seen QS written on all bases, but perhaps policies-incepting is slightly more appropriate because then you're sharing all the premiums written over the year (and resulting claims) in the same proportion. If, for example, you did it on a claims occurring basis, you'd have to share some of the policies sold in the year in one proportion, others in another proportion (the ones that had claims the following year), etc. Not much of an issue, though.
I'll have a go! So say you have an XL written on an LOD basis covering 2008. Cedant starts selling business as usual. Some claims come in on that business in 2008, but some don't come in until 2009, by which time they're covered by 2009's XL LOD contract. So who owes who what? We've got to split the claims into those occurring in 2008 and those occurring in 2009. And then do something with the premiums too. Just sounds a bit messy to me! Alternative. Have XL written on RAD basis covering 2008. Now we can just split all the business sold that year, and all the claims resulting from that business (which will just be from the same policy records). Sounds easier to me.
Re: Thanks for the answer now I am clear as to why it is most appropriate to use policies-incepting basis for proportional business
