The Pro Rata Property Treaty



	2 *Outline* The Pro Rata Property Treaty ORIGINS AND FUNCTIONS OF TREATIES 36 TYPES OF PRO RATA PROPERTY TREATIES 39 The Quota Share Treaty Benefits to the Ceding Company Replenish Policyholder Surplus Improve Financial Rating Encourage New Lines of Underwriting Afford Fronting Provide Catastrophe Protection Increase Net Insurance Liability Retention Variations and Exceptions Portfolio v. Running Account Net v. Gross Account The "Guaranteed-Profit" Quota Share Agreement The Surplus Share Treaty Definition Varying Percentages of Sharing Varying Obligatory Requirements Purpose Maximum Limit Per Risk Multiples of Net Retention Minimum Retention Required Advantages Second and Third Surplus Share Treaty Balance and Premium Volume Guidelines PRICING 56 Flat Commission Contingent Commission Sliding Scale Commission SIGNIFICANT CONCEPTS AND PRACTICES 61 The Transfer of Risk Retention Warranties Coverage and Limits Attachment of Liability Risk Definition Following Fortunes, Settlements, and Original Conditions Protecting the Surplus Treaty Reporting Transactions Termination Changes Caused by 1992's Hurricane Andrew SUMMARY 72 2 The Pro Rata Property Treaty by Jean F. Webb IV * It would be an unusual insurance company that did not need reinsurance to protect its financial resources from severe underwriting losses. Severe losses may arise from large insured risks or exposures, from risks of any size damaged in a common loss occurrence (i.e., a hurricane), or from high frequency of losses. The form and amount of reinsurance needed depend upon the size of the insurer, the nature of its book of business, and the type of loss exposure that is being addressed. For example, if a company is concerned that a few of its policies are written for amounts of insurance much larger than the rest of the company's policies, those larger policies might be individually reinsured by means of facultative certificates. A facultative certificate is sometimes referred to as a "reinsurance policy." The wording is somewhat standard in describing the reinsurance underwriter's commitment after the original risk and its exposures are appraised. Individual negotiation by insurer and reinsurer of each policy is necessary, with expensive duplication of the underwriting function. Accordingly, when large volumes of insurance policies need to be reinsured, insurers obtain most of their reinsurance through one or more reinsurance treaties. A treaty is a reinsurance agreement between the policy-issuing insurer and the reinsurer that covers many policies automatically. The policy-issuing insurer is also known by other names: the reinsured, the primary company (as the first in the insuring process), or in pro rata reinsurance where cessions are made, the ceding company or the cedent. A typical treaty will include as many as thirty or forty nonstandard clauses or articles, each necessary to describe 1) the class or classes of business being reinsured, 2) the type and amount of reinsurance . . . * CPCU, Retired Senior Vice President, Treaty Property Department, Prudential Reinsurance Company (now EVEREST RE), 1 Nostrand Road, Cranbury NJ 08512. An autobiography follows the chapter, in which his additional services as coeditor of this and other books are noted. Mr. Webb would like to acknowledge the contribution of his long-time secretary at Pru Re, Joan Pfeifer, whose devotion to this project lasted long past his retirement.

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