Property Per Risk Excess of Loss Reinsurance

PURPOSES AND CHARACTERISTICS                                  80
     Reported Claim Counts

     Experience Rating
     Ruin Model

     Monte Carlo Simulation
COMMON CONTRACT PROVISIONS                                    90
     Retention and Limit

     Net Retained Lines

     Definition of Risk: Subjective, Objective, Hybrid
     Net Loss
     Definition of Occurrence
     Allocated Loss Adjustment Expense

     Losses in Excess of Policy Limits (XPL), Extra Contractual
          Obligations (ECO), and Punitive Damages
RATING PLANS                                                                        105
     Prospective v. Retrospective Rating
     Rating Methodology
          Experience Rating

               Loss Trending
               Excess Loss Development
               Benchmark Data
               Allocated Loss Adjustment Expenses
               Premium Adjustments
               Reinsurer Loading
          Exposure Rating
               Property Exposure Rating Scales
               Expected Loss Component
               Allocated Loss Adjustment Expenses
               Discount Factors
SUMMARY                                                                                120


Property Per Risk
Excess of Loss Reinsurance 1

by Michael Hollenbach *

     The fundamental concepts of reinsurance are simple but have been complicated somewhat by the language of reinsurance, the external rules that govern reinsurance (such as accounting and legal), and the variable uses of reinsurance to create a program for the reinsured insurance company. The structure of any reinsurance program is determined by the relation of its parts, the various reinsurance contracts comprising it.

     The purpose of this chapter is to describe one type of reinsurance, property per risk excess of loss, with its characteristics and how it may be used with other types to form a company's reinsurance program. Casualty per risk excess of loss is treated in the next chapter of this book. This chapter will identify the primary insurance company (whose policies are being reinsured by a reinsurer) as the original insurer, the company, the insurer, or the reinsured. The reinsurer will be known only as the reinsurer. While this chapter will focus on treaty aspects of its subject, excess of loss reinsurance is also available on a facultative basis for individual policies, as covered in the facultative chapter of this book.

     Insurance companies insuring property risks issue policies for selected types of property insurance in certain geographic areas. Based upon various factors, such as the insurance company's size, the type of property exposures written, the competitive environment in which the company operates, and the company's own risk appetite, a company may reinsure certain portions of its policy limits above its desired loss retention to reduce its net exposure on any one risk. Such reinsurance when arranged on a portfolio (or treaty) basis is property per risk excess of loss treaty reinsurance.

* Vice President and Principal, TOWERS PERRIN REINSURANCE, Mellon Bank Center, 1735 Market Street, Philadelphia PA 19103-7501.
1   This chapter is based significantly upon "The Working Excess of Loss Treaty in Property Insurance," by Stanford Miller in Robert W. Strain, ed., Reinsurance, 1980 (First Printing), The College of Insurance, pp. 161-184. The current author extends thanks to J. Steven Neyer, Vice President, Principal and Manager - Financial Services, Towers Perrin Reinsurance, for assistance on parts of the chapter.

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