Professional Indemnity Reinsurance

12 September 2001

1.1 Contents

1 Introduction

2 Characteristics of PI

3 Basic Functions and Forms of Reinsurance

4 XL Reinsurance

5 Pro Rata Reinsurance

6 Pro Rata v XL

7 Stop Loss

8 General Comments

1.2 Two Fundamental Assumptions

In the medium/long-term:

1 Original business is profitable

2 Cedants pay for their reinsurance recoveries

1.3 Approaches to Designing Reinsurance Program

• Understand the original business - per risk

portfolio

• Assess needs and Capabilities of cedent

• Program should support original business

• Profit maximisation v stable profit stream

2.0 Characteristics of PI

2.1 Casualty Reinsurance

Spectrum

Motor

EL

PL

Products

PI

D&O

W&I

EIL

2.2 Nature of Losses

• Systemic

• Large single losses -severity

• Attrition - Frequency

• Complexity

• Long Tail

2.3 Original Business

• Claims Made

• Each & Every Loss/Aggregate

• Costs

• North America

• Wide Variety of Wordings

2.4 The Market

• Relatively Compact Subscription market

• Highly accumulative on target risks

• Capacity becomes aggregate

3 Basic Functions and Forms of Reinsurance

Function

Capacity

Revenue Result

Balance Sheet

Form

Surplus Treaty/Quota

Coded Risk XL

Top Layer XL

Working XL

Low Level Clash XL

Stop Loss

Quota Share

High Level XL

Stop Loss

4.0 XL Reinsurance

4.1 Description of Loss

• Reinsured to the sole judge

• Follow original policy wording

• Aggregate Extension Clause

• Letter of intent

• Common Cause

• Event

4.2 Per Insured Per Event

• LOD/RAD

• Stacking of Accumulations

• Congruity of Cover

• Clash Cover

4.3 ‘Clash’ Cover

20m

10m

Event Per insured 1m

4.4 Features to Consider

• Extent of Costs Break - out Cover

• Reinstatements / Sideways Cover

• Reinstatement Premiums

• Back- up Layers

• Aggregate Deductibles

• Profit Commission/Commutation

• Indexation

• Breadth of Coverage

5.0 Pro Rata

5.1 General

• Exposure to systematic/attritional losses

• QST/FST or ‘ Chute’

• Commission

• Profit Commission

5.2 Features to Consider

• Definition of Retention

• Cession Limit in relation to retention

• Loss Ratio Capacity

• Procedures for written/signed lines

6 Pro Rata v XL

6.1 XL

Pros

Premium Retention

Administration

Cons

Retention of attritional claims

M & D Premium

Definition of Loss

Limited Sideways

Paid Reinstatements

No Commission

Not ‘following the fortunes’

6.2 Pro Rata

Pros

Pay-as-you-use

Attritional relief

Transparency

Reduced risk of Coverage disputes

Unlimited sideways cover

Overider and profit commission

Cons

Leakage of profit

Adverse cashflow

Administrative burden

7 Stop Loss

• Result dependent on much as Rating levels as claims activity

• Cyclical nature of results

• Systematic exposure

• Long-tail in relation to revenue/underwriting Year

8 General Comments

• Need for long-term security

• Transparency

• Clarity of intention

• Congruity of Cover

• Claims Control/Co-operation

• Event Definitions