Pricing Reinsurance

EXPERIENCE RATING EXCESS OF LOSS                          404
     Premium Adjustments
          Exposure base, inflation sensitive
          Rate changes
          Deviation changes
     Loss Adjustments
          Incurred versus frequency and severity
     Burning Cost Ratio
     Time Value of Money
EXPOSURE RATING EXCESS OF LOSS                            423
     Casualty Covers
          Using ISO increased limit factors
          Using NCCI excess loss premium factors
     Per Risk Property Covers
ALTERNATIVE RATING STRUCTURES                          438

     Retrospectively Rated Treaties
     Aggregate Deductible Treaties
CASUALTY CONTINGENCY (CLASH)                            445
     Basic Charge Surcharges

PROPERTY CATASTROPHE                                              454
     Experience Rating
     Exposure Rating Models
PRO RATA PRICING                                                            458

     Ceding Commission Structure
     Estimating Ultimate Loss Ratio
SUMMARY                                                                            467


Pricing Reinsurance

by Bonnie Boccitto *

     The pricing of reinsurance contracts differs from pricing primary insurance policies in significant ways. 1) Reinsurance rates are neither regulated nor filed with state insurance departments, as required of many primary insurance rates. 2) Because of the unique nature of each reinsurance contract, no `'manual'' or published rates exist that can be applied across the board for any type of reinsurance. 3) No central data collection organization for reinsurance is used to calculate or publish reinsurance rates or loss costs. 4) The data available to price any one reinsurance contract may be sparse and incapable of producing wholly credible pricing results.

     Despite these differences, the pricing of reinsurance rests on the same basic actuarial principles used to price primary insurance. Subjective criteria, however, tend to play a larger role in reinsurance pricing than in primary pricing. These subjective criteria include for each reinsured company (henceforth in this chapter, the company): 1) an evaluation of the expertise of company management, 2) the historic and projected financial stability of the company, 3) the claims handling ability of the company, 4) the underwriting and risk selection expertise of company underwriters, and 5) the quality of the historic and projected data from the company.

     Pricing varies by type of reinsurance. Excess of loss reinsurance covers are generally priced in one of three ways: experience rating, exposure rating, or subjective rating. Experience rating is used when the contract being priced has sufficient historical experience to project future results. This methodology, with a few minor changes, is applicable to both property and casualty covers. Exposure rating is used . . .

* FCAS, CPCU, Managing Director and Chief Underwriting Officer, Risk Capital Reinsurance Company, 20 Horseneck Lane, Greenwich CT 06830. An autobiography appears at the end of the chapter.

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