The essence of non-proportional reinsurance

In non-proportional reinsurance liability is divided not by shares of the sum insured but by the size of the loss. The cedent pays losses up to an agreed level — the priority (retention) — and the reinsurer reimburses the excess within the limit. The premium is calculated separately, based on the probability and severity of losses that may reach the protected level, and not as a share of the original premium. A reinsurance commission is, as a rule, not provided for in such treaties.

Main types

  • Excess of loss per risk — protects against a large loss on a single object or policy. It is used to limit the effect of individual heavy losses on the result.
  • Excess of loss per event (catastrophe) — protects against the accumulation of losses on many policies from a single event: earthquake, flood, hurricane, mass accident. A key tool for property portfolios in seismically active areas.
  • Stop loss (excess of loss ratio) — protects the year's overall result for a class of insurance: the reinsurer pays if the loss ratio exceeds an agreed level.

These forms are used in treaty programs, and excess of loss per risk also on a facultative basis for individual objects.

Layers and the structure of protection

Large protection is usually divided into several layers: the first begins above the priority, and each next one sits above the previous. The split makes it possible to bring in different reinsurers: some are willing to work in the lower layers with more frequent losses, others in the upper ones, where events are rare but severe. For each layer the limit, price and number of reinstatements are set separately — the possibility of restoring an exhausted limit after a payment, as a rule for an additional premium.

Advantages and limitations

Non-proportional protection is more economical than proportional: the cedent keeps most of the premium on small and medium losses and pays only for protection against heavy ones. It precisely limits the maximum loss per risk or event, which is important for capital management and meeting regulatory requirements. Limitations: the price is sensitive to loss experience and the market situation, and after a major event the terms can tighten sharply; calculation requires good-quality data on losses and accumulations; and a poorly chosen priority leaves the cedent with too great a burden or makes the protection expensive.

Key terms

  • the priority (retention) and limit of each layer;
  • the definition of an event and the hours clause — the period within which losses are treated as one event;
  • basis of cover — losses occurring during the period, or risks attaching;
  • minimum and deposit premium, and the procedure for adjusting it to the actual volume of the portfolio;
  • the number and cost of reinstatements;
  • an indexation clause for losses with a long settlement period;
  • exclusions, territory, currency and settlement procedure.

What data is needed for a quotation

  • the target level of retention in light of capital and risk appetite;
  • the desired limits and structure of layers;
  • large-loss scenarios, data on accumulation of liability by territory, and the history of large losses;
  • the terms and period of the program, and the premium volume of the protected portfolio.

How Polis Re helps

The Polis Re broker helps determine the priority and limits, analyses loss history and accumulations, proposes a split into layers, presents the program to reinsurers on the domestic and international market and negotiates price and reinstatements. For comparison with the share-based scheme see the proportional reinsurance page, and for terms the glossary. To get started, send a reinsurance request.