Bill Hodson – Executive Vice President, USA Risk Intermediaries, LLC
Joseph Meli – Senior Vice President, General Reinsurance Corporation
Garry Bright – Director of Operations, Besso Re
•To age prematurely, and become obese & gray
haired…
WARNING: Side effects may
include…
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•Stabilization – reinsurance can smooth operating results over
time.
•Capacity – reinsurance can improve a NWP/PHS ratio.
•Surlpus Relief – reinsurance can ease the strain on PHS during
rapid growth.
•Catastrophe Protection – reinsurance can back-stop a
company’s financials in case of a natural or man-made
catastrophic event.
• Market Entrance/Market Withdrawal – reinsurance can
provide capacity/expertise to write a new line, and provide an
exit strategy for running business off or exiting a line.
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Facultative – reinsurance indemnification of standalone risks/policies. The ceding insurer is not
obligated to submit a particular policy, and the
reinsurer is not obligated to assume any risk/policy
submitted; each party has the “faculty” or option of
submission or acceptance.
Treaty – reinsurance indemnification for a pool or
“book” of policies from one or more specific classes
of insurance.
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Facultative:
Treaty:
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*This session is just a synopsis of the most common terms/conditions of a reinsurance agreement. To do the subject any justice, we would need to be here for at least two to
three days. And honestly who wants to sit in a freezing room listening to the three guys up front drone on…and on…and on…about reinsurance? I mean really. And your phone
only has so much battery left, right? So after the first couple of hours playing Candy Crush or Angry Birds, you’re back to square one bored to tears and looking like this guy
above…but I digress…….
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Risks Attaching/Policies Attaching – subject policies
having inception/renewal dates falling within the
effective dates of the reinsurance cover.
Losses Occurring – dates of loss within the effective
dates of the reinsurance on in-force policies
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Written Premium – reinsurance premium is
calculated using Written Premium. This is more
appropriate/equitable when there is a stable or
declining book of business, as the premium vs.
exposure is matched more evenly.
Earned Premium – reinsurance premium is
calculated using Earned Premium. This is more
appropriate/equitable when a book of business is
growing. Generally used for Excess of Loss
agreements, however when used with Quota Share
this helps with a cedant’s cash flow.
A variation would be to cede using collected
premium as the basis for calculation.
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Pro Rata – a percentage or stated amount sharing of
liability with reinsurers.
Excess of Loss – a stated amount of reinsurers’
liability above a specified amount retained net by the
cedant. Reinstatements of limits are either provided
“free”, for a pro-rata additional premium, or a
combination of both.
Surplus Share – a hybrid of the above, where a limit is
ceded pro rata above a predetermined retention (or
“line”).
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Pro Rata Cession (Quota Share) – a straight
sharing of original policy premium with the
reinsurers.
Flat Rate (Excess of Loss) – specific stated
percentage of Subject Premium (either GNWPI or
GNEPI) charged for contract period. Usually
obtainable when the cedant has a stable/mature
book of business and reinsurers can price using
the cedant’s historic developed loss data.
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Swing or Variable Rate (Excess of Loss) – a percentage
range against which the Subject Premium is applied and
the reinsurance premium for the contract period is
calculated. The specific percentage applied is derived
by first calculating the specific experience (loss ratio) of
the reinsurance. The higher the loss ratio, the higher
the reinsurance rate and vice versa.
Excess Cession Rate (Excess of Loss) – a rating
mechanism whereby each reinsured policy is ceded to
reinsurer individually (or on a collective basis) based on
the exposure of the policy limits to the reinsurance
limits (usually based on Increased Limit Factors).
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Ceding Commission - an amount deducted from the
reinsurance premium to compensate a ceding
company for its acquisition and other overhead costs,
including premium taxes.
Contingent (or Profit) Commission - an allowance by
the reinsurer to the cedant based on a
predetermined percentage of the profit realized by
the reinsurer on the business ceded.
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Actual (Monthly/Quarterly in Arrears) – the
reinsurance premium for ceded policies is paid to
reinsurers monthly or quarterly as prescribed by
the reinsurance agreement (i.e. “x” days following
the end of the month/quarter…).
Advance Deposit – the reinsurance premium is
paid on an estimated basis monthly, quarterly or
semi-annually, and adjusted to the actual
premium due after the end of the Agreement
Year. Commonly a percentage of the “developed”
premium divided by 12/4/2, etc.
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If a broker is involved in the placement, best
practices dictate that a Reinsurance Brokerage
Agreement/Intermediary Agreement be
signed between the Ceding Company and their
broker.
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Topics For Today…
Certificate Overview
The Declarations Page
Reinsurance Terms and Conditions
We will discuss common provisions of facultative
reinsurance
As Facultative is “one off” specific of contracts may differ
from company to company and risk to risk
1
Certificate Overview
Binding contract between reinsurer and ceding company
Evidence of reinsurance coverage
Insured is NOT a party to the contract
Reinsurer and cedent are only parties to the
contract
1
The Declarations Page
Entire Agreement
Parties to the contract
Insured Information
Schedule of reinsurance
Countersignature
Endorsements
1
The Declarations Page
Entire Agreement Clause
Certificate constitutes the entire agreement of the parties
Parties to the contract
• Reinsurance company name
• Certificate number
• Certificate period
• Retroactive date (for Clams Made)
• Policy information [number, period, retro date (CM)]
Insured information
• Name and Location
2
Schedule of reinsurance
Type of insurance
Policy limit
Company Retention
Reinsurance provided
Basis of acceptance
Premium
Certificate modifications, if any
2
Type of insurance
> Policy coverage
> Commercial General Liability BI and PD
Policy Limit
> Each Occurrence Limit
> Products Completed Operations Aggregate Limit
> Personal Injury and Advertising Injury Limit
Company Retention
> Part of the limit retained by the company
> Specific percentage or dollar amount
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Reinsurance Provided
Part of the limit ceded to the reinsurer
Specific percentage or dollar amount
Basis of Acceptance
Excess of loss or contributing excess
Concurrent or non-concurrent
Premium
Flat or adjustable
Basis: sales, payroll, units, etc.
Certificate Modifications
Any correction to the certificate information
2
Countersignature
Authorized representative signature
Endorsements
Audit of exposures
Policy cancelled by company
2
Common Reinsurance Certificate Terms and Conditions
Preamble
Retention and limit
Term
Claims and losses
Adjustment expenses
Rights
Inspection
Definitions
Recoveries
Premium Tax
Insolvency of the company
Offset
Termination
2
Preamble
Evidence of a contract
Specific reference to company policies
Retention and Limit
Company to retain Retention net
Reinsurance follows the policy
Company to send reinsurer copy of policy and advise
of any coverage changes
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Term
The term of the policy
Claims and Losses
Company notice to reinsurer
Company estimate of value of injury or damages sufficient
to involve certificate
One third of retention
Reinsurer right to associate (not handle claims)
All settlements by company within terms of policy
are binding on reinsurer subject to proof of loss
2
Adjustment Expenses, Rights, Inspection, Non-Concurrent
Terms, Definitions,Recoveries, Premium Tax, Insolvency,
Offset, Arbitration…
…Wait for it…(Garry will cover that)
2
Termination
Cancellation of company policy terminates
reinsurance
Company/reinsurer cancellation with notice
Reinsurer cancellation for non-payment of
premium
2
Treaty Reinsurance
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All clauses in A treaty reinsurance contract are important but
which are significant and can affect the coverage?
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•As we have heard, facultative reinsurance protects a Company for their
individual risks that perhaps will not fall into their reinsurance treaty.
•A treaty reinsurance protects the Company for all risks in a given portfolio,
with the Reinsurer not able to pick and choose which risks are included.
•Therefor, it is a partnership between Company and Reinsurer, and so it is
important to get the terms and conditions of the contract correct, to
ensure the protection of the portfolio is as required.
We will look at some of the important clauses and coverage options.
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ARTICLE I
Business Covered:
The Reinsurer agrees to indemnify the Company as set forth herein in respect of
the net excess liability which may accrue to the Company under all policies,
contracts, binders and other evidences of insurance, whether oral or written
(hereinafter called “Policy” or “Policies”), classified by the Company
as………………
ENSURE THAT EVERYTHING THAT IS TO BE COVERED IS INCLUDED.
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ARTICLE III
Commencement and Termination:
This Contract shall incept at 12:01 A.M., Local Standard Time, at the
location of the risk, April 1, 2014 and shall remain in force until 12:01
A.M., Local Standard Time at the location of the risk, April 1, 2015, as
respects all claims made on new and renewal Policies with attaching
during this period, including Extended Reporting Endorsements on such
Policies.
Upon expiration of this Agreement, the Company may elect to “run-off” or “cutoff” the remaining liability of the treaty. Should the Company elect a run-off
termination, the Reinsurer will continue to cover all policies within the scope of
this Agreement including those written and renewed during the period of
notice, until the natural expiration or anniversary of such policies, whichever
comes first but in no event longer than 12 months from the date of termination,
plus odd-time (18 months). Should the Company elect a cut-off termination, the
Company shall terminate the Reinsurer’s liability for all losses occurring
subsequent to expiration, and Reinsurers shall return unearned premium to the
Company.
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ARTICLE VIII
Allocated Loss Adjustment Expenses:
“Allocated Loss Adjustment Expense” as used herein means all costs and expenses
allocable to a specific claim that are incurred by the Company in the investigation,
appraisal, adjustment, settlement, litigation, defense and/or appeal of a specific
claim, including court costs and costs of supersedeas and appeal bonds, and
including post-judgment interest.
Allocated Loss Adjustment Expense does not include unallocated loss adjustment
expense. Unallocated loss adjustment expense includes, but is not limited to,
salaries and expenses of employees, and office and other overhead expenses.
If the original policy is costs inclusive, the treaty should include ALAE within the
Ultimate Net Loss and the treaty limit.
If the original policy is costs in addition, the treaty should include ALAE as pro rata
costs in addition to the indemnity.
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ARTICLE X Extra Contractual Obligations and Losses in
Excess of Policy Limits:
This Contract shall cover Extra Contractual Obligations, as
provided in the definition of Ultimate Net Loss. "Extra Contractual
Obligations" shall be defined as those liabilities not covered
under any other provision of this Contract and that arise from the
handling of any claim on business covered hereunder, such
liabilities arising because of, but not limited to, the following:
failure by the Company to settle within the Policy limit, or by
reason of alleged or actual negligence, fraud or bad faith in
rejecting an offer of settlement or in the preparation of the
defense or in the trial of any action against its insured or
reinsured or in the preparation or prosecution of an appeal
consequent upon such action.
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ARTICLE X Extra Contractual Obligations and Losses in Excess of Policy
Limits:
This Contract shall cover Loss in Excess of Policy Limits, as provided in the
definition of Ultimate Net Loss. "Loss in Excess of Policy Limits" shall be defined
as Loss in excess of the Policy limit, having been incurred because of, but not
limited to, failure by the Company to settle within the Policy limit or by reason of
alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or
in the preparation of the defense or in the trial of any action against its insured or
reinsured or in the preparation or prosecution of an appeal consequent upon such
action.
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Extra Contractual Obligations and Losses in Excess of Policy Limits - continued:
An Extra Contractual Obligation and/or Loss in Excess of Policy Limits shall be
deemed to have been incurred on the same date as the loss covered under the
Company's Policy, and shall constitute part of the original loss.
For the purposes of the Loss in Excess of Policy Limits coverage hereunder, the
word "Loss" shall mean any amounts for which the Company would have been
contractually liable to pay had it not been for the limit of the original Policy.
In no event shall coverage be provided to the extent not permitted under law.
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Swing rated
Flat rated
Adjustable
Reinstatements – paid or free
Multi year or single year
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Rights
Contract between company and reinsurer
only parties with rights under agreement
Insolvency of company
Liquidator steps in shoes of cedent
Inspection
Reinsurer right to review records related to
underwriting the reinsured risks and claim
documents
4
Definitions:
Non-Concurrent
When the certificate is not reinsuring the exact same
coverage provided in the policy
Hazards
BI only, Products only, PD only)
Risk of loss
Specific exposure units, designated products, dates
of coverage
Reinsurance carves out only part of the hazards or risks of
loss
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Definitions
Prejudgment Interest
Time lapse between date of accident and date of
judgment
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Recoveries (Subrogation and Salvage)
Reinsured loss reduced by recoveries made
Excess of loss reinsurer first to benefit
Contributing excess benefit is proportional to coverage
Premium tax: Responsibility of the company
Insolvency of the company
Reinsured payments determined in insolvency proceedings
Paid to liquidator
Reinsurer retains right to investigate and defend
Offset
Applies to either party
4
Termination
Cancellation of company policy terminates
reinsurance
Company/reinsurer cancellation with notice
Reinsurer cancellation for non-payment of
premium
Arbitration
Differences between company and reinsurer
resolved through arbitration
Binding on parties
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Additional Material for Reinsurance
Enlightenment...
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Capacity (Higher Limits)
Treaty protection
Treaty exclusion
New line of business
New hazard or coverage
Access to expertise and services
Opportunity for a dialog
(underwriting, pricing, market conditions, etc.)
Tough piece of otherwise acceptable account
Accommodation business for an important producer
4
“Carve Out”
Exceptional volatility in one area of the program
Operations in a highly litigious environment (USA, UK, Australia)
Sales of an exposed product (toys, bicycle helmets, fork lifts, etc.)
New insurance product
Volatile line of business (Product Recall)
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Treaty
Treaty covers all risks which
are not excluded
Treaty is obligatory
Insurer must cede the risk
Reinsurer must accept the risk
Premium is a rate on base,
adjustable
Limited Reinstatements, usually
(NP)
Some “balance”
Payback desired
Facultative
Covers individual risks which
are ceded individually
Not obligatory
Insurer decides whether to cede
Reinsurer free to decide if to
accept
Fixed price
Unlimited free reinstatements
No balance, rather anti-selection!
No payback
4
Definitions
Excess of loss
Reinsurer pays for that portion of loss in excess of the
company retention and within the policy limit
Where Loss Adjustment Expenses are in addition to
the policy limit
Reinsurer pays its proportionate share of expenses
Same proportion as reinsured loss bears to gross
company loss
No indemnity loss=no expense obligation to
reinsurer
5
Excess of Loss Example
Policy Limit: $5,000,000 ea occ / agg
Our reinsurance: $4,000,000 xs $1,000,000
Total (ground up) loss:
$2,000,000 Indemnity ($1,000,000 to the reinsured layer.)
$500,000
Allocated Loss Adjustment Expense (ALAE)
Formula for calculating the reinsurance Allocated
Loss Adjustment Expense payment:
$1,000,000 (Reinsurance Loss Payment)
$2,000,000 (Company Gross Loss Paymen)
1,000,000 = 0.50 X 500,000 = 250,000 (reinsured ALAE)
2,000,000
5
Definitions
Contributing Excess
Applies to those cession that attach directly excess of
either other valid insurance of self-Insurance
Applies “first dollar” within the company’s policy
Reinsurer contributes proportionately to all loss
within the policy limit and adjustment expenses
5
Contributing Excess Example
Excess Policy Limit: $5,000,000 ea occ / agg; excess $1,000,000 ea occ / agg
Reinsurance: 80% of the Policy Limit
Total (ground up) loss: $2,000,000 Indemnity
Excess Policy Loss: $1,000,000 Indemnity
$500,000 total Allocated Loss Adjustment Expense (ALAE)
$100,000 ALAE tendered (attributed) to excess policy
underlying
Formula for calculating the reinsurance Allocated Loss Adjustment Expense payment:
•
• Loss Payment)
80% of $1,000,000 = $ 800,000 (Reinsurance
$1,000,000(Company Gross Loss Payment)
= .80 x $100,000 = $80,000
Reinsurance
ALAE
Payment
5
PRIMARY EXCESS OF LOSS
This protects the Company for their whole portfolio at a low attachment point, giving predictability to
the Company. The reinsurance will follow closely the original policy terminology and typically will
be key to the regulators and rating agencies, as applicable. Most new Companies will require a
working layer reinsurance to allow them to write business. It is often that the retention is around
10% of surplus at the outset. Primary reinsurance allows the Company to write more business,
with 4 x the net retained premium being deemed reasonable.
RATED EXCESS
This is for coverage excess of the primary whereby the Reinsurer will charge a price, based on the
overall premium block. This can mean variable original limits covered by Reinsurers within the
reinsurance treaty with original pricing flexibility by the Company.
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AWARDS MADE – Sample Language:
The Reinsurer agrees to indemnify the Company as set forth herein in respect of Awards Made during the term of
this Contract under all policies, contracts, binders and other evidences of insurance, whether oral or written
(hereinafter called “Policy” or "Policies"), classified by the Company as Medical Professional Liability Business,
including Surgery Centers, Walk In Clinics, and Ancillary staff, and as General Liability, written on a claims made
basis only, in respect of Surgery Centers and Walk In Clinics.
The Reinsurer shall be liable for of $3,000,000 Ultimate Net Loss, each and every Award Made, each insured
excess of the applicable underlying excess of loss reinsurance, each and every Award Made, each insured.
It is hereby warranted that the Company shall retain 10% of the Ultimate Net Loss hereunder net and unreinsured. It is further warranted that the Company's underlying inuring reinsurance shall be deemed to be in-force
for the duration of this Contract.
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EXCESS CESSION –
A cession reinsurance contract differs from a rated excess programme as the
Reinsurer only covers limits that are exposed (ceded) to the Reinsurer. ECO and
XPL may only be covered if a policy has been ceded. The Reinsurer will typically
have to agree the pricing for each policy limit that is to be ceded, although of
course, not each risk.
The excess cession treaty is inherently more volatile and so can be more
restrictive.
The Reinsurer will usually allow the Company a commission, which helps to
reduce the costs of running the business.
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QUOTA SHARE The quota share reinsurance is where the Reinsurer agrees to take a percentage
share of the portfolio, and is therefore a partner in the outcome. The Reinsurer
will allow a commission against the costs of writing the business, which can be
very important, but the Company needs to ensure that this is actually enough to
cover expense. Quota share works well when the Company is small and would
find it difficult to take the first part of loss as a retention. The downside is that the
Reinsurer takes a large percentage of profit and this can slow down any growth
of surplus for the Company.
In addition, the Reinsurer may want to impose a number of restrictions on how
the Company underwrites and what business can be included, so may be more
restrictive than excess of loss.
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STOP LOSS
This is a very specialised market, with only a few reinsurers willing to take on this
risk. Stop loss covers the Company for all losses excess of a pre-determined
percentage or $ figure (which will typically be based on an estimated percentage
of premium), and will give a limit to the Company. This will give the Company
(hopefully) a known ultimate loss ratio as the Reinsurer will take the downside
beyond the percentage attachment. The problem for Reinsurers is that they take
a significant downside potential for a limited premium, but we do have some who
are willing to take on this risk, usually to assist clients who have built a good
relationship with Reinsurers.
100% of USD5,000,000 Ultimate Net Loss in the aggregate excess of
USD10,000,000 Ultimate Net Loss in the aggregate.
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ADVERSE DEVELOPMENT COVER
This is again a specialised coverage, similar to stop loss in that it will protect the Company from any downside
above a certain figure, and so gives certainty to the Company. The significant difference is that ADC is put in
place at some point after the end of the treaty period, where the Company has concerns over the development of
the book or where the actuary has a worse view of the business than the Company does. Therefore, the
Company can purchase protection above a percentage of $ figure, to flatten the result. This is a limited
reinsurance market, and typically for a Company with who the Reinsurer has a good partnership, and where there
is a strong incentive to have a good result.
“Losses paid during the term of the reinsurance only on risks attaching during years 2009 through 2012.
The Company obligates itself to cede to the Reinsurer, and the Reinsurer obligates itself to accept, the difference
between the Company’s paid losses of USD20,000,000 and the Company’s paid losses of USD15,000,000 in
respect of Incurred and Incurred but not reported losses that are paid during the period of the reinsurance but only
ever in respect of a maximum of USD250,000 arising from each and every original policy.”
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SYSTEMIC/COMMON CAUSE REINSURANCE
This coverage is seen in medical professional liability treaties, as an additional section to the
primary reinsurance treaty, although is usually purchased when the Company is large or is a single
specialty Company where they could easily have a number of losses related to the same common
conditions. For example, we have in the past seen a large numbers of claims from one or more
doctors involved in a particular type of practice (heart stents). This could be critical to a Company
as each individual claim could be within the retention but the total of a large number of retained
losses could be terminal to the Company.
“Common Loss as used herein shall mean the aggregate of all Loss or Losses under all policies of
the Company, arising out of, caused by or attributable to one of the following Covered Perils...”
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