There are two basic approaches for pricing of reinsurance contracts : exposure rating and experience rating. Both methods can be used as separate rating approaches or may be weighted together to calculate the expected loss for a contract that is then used as the basis for pricing the reinsurance.- Experience Rating (also known as Loss Rating)An approach by which the expected loss is determined based on the ceding company’s historical loss experience, actual and reconstructed (e.g., trended, developed – brought to current levels).
– Exposure Rating
An approach by which the expected loss is determined based on analysis of the exposure (e.g., limits, classes, etc) inherent in the business being covered by the contract based on industry experience for the same type of business (rather than on the actual historical loss experience of the company).
– Flat Rate
1) A fixed insurance premium rate not subject to any subsequent adjustment. 2) A reinsurance premium rate applicable to the entire premium income derived by the ceding company from the business ceded to the reinsurer as distinguished from a rate applicable to excess limits.
– Funded Cover
A type of excess of loss reinsurance agreement under which the reinsured company pays an agreed upon premium to build a fund (which is held by the insurer or reinsurer pursuant to the terms of the agreement) from which to pay covered losses. Since that fund reduces the reinsurer’s risk that losses will exceed the fund, the Reinsurer agrees to accept a reduced reinsurance margin. Any excess monies in the fund will be returned to the appropriate party pursuant to the terms of the contract. Funded covers that do not transfer sufficient insurance risk to the reinsurer must be accounted for as deposits.
– Funds Withheld
A provision in a reinsurance treaty under which the premium due the reinsurer is withheld and not paid by the ceding company to enable the ceding company to reduce its liability for unauthorized reinsurance with respect to credit for reinsurance in its statutory statement. Funds withheld may also be used to reduce the ceding company’s exposure to credit risk from a reinsurer. The reinsurer’s asset, in lieu of cash, is “funds held by or deposited with reinsured companies.”
– Prospective Rating (also known as Flat Rating)
A formula for calculation of reinsurance premium for a specified period where a fixed rate is promulgated and the premium for the current period is calculated by multiplying the fixed rate by the current period subject premium.
– Retrospective Rating (also known as Self Rating, Swing Rating, and Loss Rating)
A formula for calculation of reinsurance premium for a specified period where a provisional rate is promulgated which is adjusted (subject to minimum and maximum) based on the current period actual loss experience. Premium for the current period is then calculated by multiplying the adjusted rate by the by the current period subject premiums.
Loss Loaded Rating (also known as Expense Loaded)
A type of retrospective rate adjustment using the same period losses multiplied by a loss load and/or expense load.
Margin Plus Rating
A type of retrospective rate adjustment using the same period losses expressed as a ratio of earned premium for the same period plus a fixed margin.
– Cessions Basis (also known as Cessions Made, Cessions Schedule)
A reinsurance pricing mechanism used on casualty reinsurance contracts where a premium for each reinsured policy is ceded to Reinsurer individually based on the exposure of the policy limits to the reinsurance limits (usually based on Increased Limit Factors).