Hi, What is the difference between reinsurance arrangements referred to as "original terms" and "quota share"? ST2 defines original terms as "Original premiums and benefits are proportionately shared" and then says that this may be on a quota share or individual surplus basis. How would an original terms individual surplus treaty operate as these seem incompatible? Seems like "original terms" and "quota share" both mean that premium and benefit is shared per some % between the insurer and reinsurer.
Hi Benjamin Proportional reinsurance can be written in two ways: original terms (OT) and risk premium (RP). In both cases the reinsurer will pay a percentage of the claims. The percentage can be determined in two ways: quota share (QS) and individual surplus (IS). So we have four possibilities: OT using QS, OT using IS. RP using QS, RP using IS. Under quota share, the reinsurer agrees to pay the same percentage for a particular class of risks. So the reinsurer might pay 30% of all term assurance claims. Under individual surplus, the percentage the reinsurer pays varies from policy to policy. The reinsurer pay a larger percentage of the larger claims. For example, the insurer may have a retention of 100. If the insurer writes a policy with sum assured of 200, then the reinsurer will pay 50%. If the insurer writes a policy with sum assured of 400, then the reinsurer will pay 75%. So QS and ID tell us how to calculate the claims paid by the reinsurer. OT and RP tell us how the reinsurance premium is calculated. Under OT, the reinsurer takes the same percentage of the premium as its claims percentage. So for the QS above, the reinsurer would take 30% of the premiums and pay 30% of the claims. For the IS above, the reinsurer would take 50% of the premium for the first contract and 75% of the premium for the second contract. Alternatively, the reinsurer could calculate a reinsurance premium using a risk premium by taking the percentage multiplied by the amount reinsured and then multiplying by an appropriate mortality rate. I hope this helps to explain the differences between the different reinsurance types. Best wishes Mark
