"Sleep-at-Night" Covers

When asked, most auditors interpret "reasonable possibility" of a loss to mean an annual probability of such loss (or more) greater than 10%.

There is no trade-off between the severity of the potential loss and the meaning of 'reasonable."

"Sleep-at-Night" covers are unlikely to be hit and have very low rates-on-line. This conflicts with the "reasonable probability" sdandard.

Example One

Catastrophe Cover

$5 million Limit

$1,000 annual premium

One reinstatement at 100%

250,000% loss ratio, if total loss

Risk Transfer?

Example Two

Workers' Compensation excess-of-loss treaty

$100 million subject premium (roughly 500,000 lives)

Statutory coverage excess of $1 million retention

$35,000 annual premium

Risk Transfer?

Example Three

Any facultative placement

Rates-on-line typically below 1%

Anyway, facultative reinsurance is brought by branch office staff who are deemed to be too greedy to worry about smoothing results

Does your auditor examine any facultative certificates to testfor risk transfer?

"Sleep-at-Night" Covers