Excess of Loss Reinsurance

Reinsurer indemnifies reinsured (up to a stated limit) once a loss(es) exceeds a pre-determined level (i.e., the deductible or retention).

Excess of Loss reinsurance is expressed as, for example, $400,000 excess $100,000. (If the insurer incurs a $500,000 loss, it is responsible for the first $100,000 of paid loss, and is reimbursed for the next $400,000).

Pricing: Percentage rate applicable to insurer’s original premium (i.e., “subject premium”) for policies covered by reinsurance.

Three types of Excess of Loss Reinsurance:

• Per Risk
  Retention and limit apply to each and every policy, individually (usually subject to an occurrence limit).


• Catastrophe (or Occurrence)
  Retention and limit apply to one or many policies in the same event.


• Aggregate (or “Stop Loss”)
  Retention and limit apply to all losses from all covered policies, in the aggregate, over a specified timeframe – usually no more than one year.

Functions:

• Per Risk: Capacity for Individual Risks


• Catastrophe: Protection against accumulation of loss


• Aggregate: Stabilization – i.e., net income protection (Finance, Catastrophe)

Functions of Reinsurance

There are four main functions of reinsurance

• Finance


• Capacity


• Stabilization (net income protection)


• Catastrophe (surplus protection)

Another reason may include product expertise held by the reinsurer, not by the reinsured.

An insurance company’s growth may be limited because of unearned premium reserve requirement(s). A company is forced to put all written premium into a UEP reserve account while still paying business (acquisition) costs, (agents’ commissions must be paid on written premium). The premium on an annual policy is earned at the rate of 1/12th per month. Because acquisition costs must be paid immediately, there can be a substantial drain on surplus, particularly when premium volume is expanding rapidly.

The accounting system used by insurance companies is designed to enhance financial strength, with state insurance regulators monitoring such items as the ratio of written premium to surplus. A general rule of thumb used to be 3 to 1, but now 2 to 1 is more often used. A ratio above 2.5 to 1 (varies by Company) could result in a company being viewed as over extended, leading to rating agency action.

Pro rata reinsurance enables a company to continue to write polices without draining capital and surplus. It reduces written premium and increases the surplus, by means of a ceding commission recouping pre-paid acquisition expenses.

Functions: 2) Capacity

The ability to offer significant capacity on any given risk allows an insurance company to compete in the market. Most companies require greater capacity than their own resources can provide. By reinsuring portions of risk, through pro rata and/or excess of loss, a company can compete in the market.

A company writing to a maximum policy limit of, say, $10,000,000 could double that capacity by arranging a surplus share reinsurance treaty. Thus, a $20,000,000 policy can be written with 50% of $10,000,000 ceded to a surplus share reinsurer(s).

Alternatively, a per risk excess of loss contract of $10,000,000 excess $10,000,000 has similar effect. On a $20,000,000 policy, all losses over $10,000,000 are paid by the reinsurers for a predetermined premium.

Functions: 3) Stabilization

Insurance companies generally prefer stable year-to-year underwriting results, rather than wide fluctuations.

Excess of loss reinsurance enables a company to determine the loss it will assume on any one risk, in any one occurrence, or in the aggregate for the entire year. Thus, losses are stopped at a certain level above which reinsurers pay.

Functions: 4) Catastrophe

Surplus needs to be protected against severity of major catastrophe, such as hurricanes, tornadoes, floods, earthquakes, hail, etc.

Most reinsurance arrangements provide some degree of coverage for these occurrences, but catastrophe excess of loss specifically addresses the accumulation of small losses, some or all or which would not be covered under any of the company’s other reinsurance.

Holborn’s Role as Reinsurance Intermediary

Advocate, consultant and advisor to insurance company clients.

Maintain business relationships with reinsurers on a worldwide basis

Structure cost effective reinsurance programs

Canvass reinsurance market to determine interest among intermediary market reinsurers in a given program bearing in mind the financial strength of each reinsurer

Constant monitoring of reinsurers’ financial condition - ability and “willingness” to pay claims

Monitor effectiveness of reinsurance program – Increase retention? Limit needs? Coverage Provided, etc.

Provide other actuarial, modeling, claims, accounting and contract wording services.

Actuarial Support

Our Mission

To offer the best combination of proprietary, commercially available and common-sense tools for our clients to systematically evaluate all of their choices for reinsurance purchasing and risk management.

Founded in 1940’s

Ahead of its time

7 employees (over 10% of our workforce)

Customized models for each client

Relationships with multiple vendors

Proprietary original models to supplement weaknesses in vendors’ models

Catastrophe modeling

• Mapping includes


• Concentration studies / “Concentrics”


• Deterministic storms / “Look-a-likes”


• Vendor-developed cat models, which we license


• Holborn’s proprietary Inland Wind Cat model

Dynamic Financial Analysis (DFA)

Optimization / risk selection

Reinsurance benchmark pricing

BCAR “What-if’s”

Risk transfer testing

Rating agency questionnaires

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