Chapter 15 Section 3.4 Treaties on a cession basis

Discussion in 'SP8' started by cheea, Mar 28, 2012.

  1. cheea

    cheea Member

    On the paragraph "In addition, the dangers of using an out of date risk profile are probably more pronounced for casualty rating, as original limits offered and purchased can vary very significantly with the insurance cycle. For this reason, it is common in some markets to structure treaties on a cessions (or ceded) basis.

    In these treaties the premiums ceded to the treaty depends directly on the limit for each original risk, and the premium is determined from ILF tables set out in the treaty.

    Can someone please explain to me what each paragraph means?

    Also, referring to the sentence 'in order to calculate the layer loss cost you take the difference between the ILF's at the upper and lower limit and normalise by dividing by the ILF at the original limit'. Can someone please tell me where is the 'original limit' in relation to the upper and lower limit? (above the upper limit, in between the upper and lower limit, below the lower limit?)
     
    Last edited by a moderator: Mar 28, 2012
    cheea, Mar 28, 2012
    #1
  2. Katherine Young

    Katherine Young ActEd Tutor Staff Member

    A cessions basis means that the premium for each reinsured risk is ceded to the reinsurer indivudally (rather than pricing the treaty in some high level way, say).

    The second paragraph means that for each risk under the treaty, the premium to be ceded is calculated by comparing the policy limits to the reinsurance limits.

    Have a look at http://www.reinsurance.org/i4a/pages/index.cfm?pageid=3477.

    Original limits will vary greatly over the underwriting cycle, so there is no clear relationship between this and the upper / lower limits.
     
    Katherine Young, Mar 29, 2012
    #2
  3. DanielZ

    DanielZ Member

    Katherine, the link you provided below no longer works. I've tried to Google it myself but have not had much luck
     
    DanielZ, Jul 31, 2014
    #3
  4. DanielZ

    DanielZ Member

    In relation to cheea's last point, surely the original limit can't be below the reinsurance lower limit, or else there would be no point in getting reinsurance in the first place?
     
    DanielZ, Jul 31, 2014
    #4
  5. Katherine Young

    Katherine Young ActEd Tutor Staff Member

    In relation to cheea's last point, ILFs just work out a new lost cost based on an old one. So you always have to have a reference limit (which could be higher or lower than the layer you’re finding the new price for).

    In relation to the final point made by DanielZ, you're correct that you wouldn’t want to include a policy under the treaty if its upper limit was below the excess point of the reinsurance treaty. However, if the reinsurance treaty was put in place to cover all policies written in a particular portfolio over a particular period, and the market cycle was such that original limits were tending to fall, then a situation could potentially arise where the upper limits for some policies in the reinsured portfolio fell below the excess point of the reinsurance treaty. In this case, presumably such reinsured policies would add zero to the overall reinsurance premium so it wouldn’t be a problem. (This example assumes that a non-proportional reinsurance treaty is being written on a policies-incepting basis, whereas it’s more usual for them to be written on a “losses occurring during” basis.)

    Finally, yes occasionally links on external websites do become obsolete occasionally, we can't do much about that here at ActEd. However, google can always find you others.
     
    Katherine Young, Aug 11, 2014
    #5

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