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Types of Proportional Insurance
- 1. Quota Share
- 2. Surplus Share
- 3. Fixed and Variable Quota Share Arrangments on Excess Business (commercial umbrella policies)
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Steps in the Pricing Analysis for Proportional Treaties
- 1. Compile historical experience on treaty
- 2. Exclude catastrophe and shock losses
- 3. Adjust experience to ultimate level and project to future periods
- 4. Select expected non-catastrophe loss ratio for treaty
- 5. Load expected non-catastrophe loss ratio for catastrophes
- 6. Estimate combined ratio given ceding commission and other expenses
- 7. Evaluate the projected combined ratio
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3 Special Features of Proportional Treaties
- 1. Sliding scale commission: % of premium paid to ceding company "slides" with actual experience
- 2. Profi t commission: Subtracts the actual loss ratio, ceding commission and a "margin" for expenses from the treaty premium and returns a % of this as additional commission
- 3. Loss Corridors: Ceding company assumes some portion of the reinsurer's liability if the loss ratio exceeds a certain amount
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Steps of Experience Rating Proportional Treaties
- 1. Gather subject premium and historical losses for as many years as possible
- 2. Adjust subject premium to future level using rate, price, and exposure inflation factors
- 3. Apply loss inflation to historical large losses and determine amount included in layer being analyzed
- 4. Apply excess development factors to summed losses for each period
- 5. Divide trended and developed layer losses by adjusted subject premium
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Free Cover
- 1. Experience rating in which no losses trend into highest portion of layer being priced
- 2. Use experience rating for lower part of layer and relativities in the exposure rating to project the higher layer
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3 Categories of Casualty Per Occurrence Excess Treaties
- 1. Working Layer - low layer attachment which is expected to be penetrated several times
- 2. Exposed Excess - attaches below some policy limits but penetrated less frequently
- 3. Class Covers - high attachment; single policy loss will not penetrate layer
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Steps of Experience Rating Casualty Per Occurrence Excess Treaties
- 1. Gather subject premium and historical losses for as many years as possible
- 2. Adjust subject premium to future level using rate, price and exposure inflation factors
- 3. Apply loss severity trend to individual historical losses and cap at applicable policy limit
- 4. Apply excess development factors to summed losses for each period
- 5. Divide trended and developed layer losses by adjusted subject premium for each historical year
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Exposure Factor for Umbrella Policies
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Exposure Factor for Umbrella with ALAE included in Loss
- Exposure Factor = [E(x; min(PL, (AP + Lim)/(1 + e))) -E(x; min(PL, AP/(1 + e)))] / E(x; PL)
- where
- a) PL = Policy Limit on Umbrella
- b) AP = Treaty attachment point
- c) Lim = Treaty Limit
- d) e = ALAE as % of loss Capped at PL
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