This section is referring only to proportional types of reinsurance. Under proportional reinsurance, the reinsurance premium is proportional to the risk borne by the reinsurer relative to the total risk.
For long-term insurances, like CI, the sum insured is known at outset. Imagine a surplus Re arrangement with retention 60,000. A policy for S=100,000 will have 40,000 reinsured - the reinsurance premium will be the premium to cover this amount of risk. A different policy with a different sum insured would have a different reinsurance premium - as it would be covering a different expected claim cost.
For short term insurances, the payments are (usually) indemnity-based, so the amount of claim is not known at outset. We don't know how much claim will be paid out, when or if a claim occurs, so we can't split the risk between the parties IN ADVANCE of the claim occurring - so we don't know what sum insured to base the reinsurance premium on.
The only thing we can do, proportionately, is quota share - because under this the reinsurer promises to pay exactly X% of every policy claim, whatever the size of the claim. Provided the reinsurance premium is then the same percentage of the insurer's full premium, then the risk (and it's cost) is being proportionately shared - and so we need to use original terms to ensure the costs are also shared proportionately.
Hope that helps!
Last edited by a moderator: Apr 20, 2015
