Mar
1
2010
The Dark Arts… Fact or Fiction
Author: Donald RowbothamIt is amazing how many people still refer to the administration of outwards reinsurance as a bit of a dark art. One area that could fit this description is how the precedence sequence for excess of loss contracts should be decided. As we are all aware, one of the fundamentals of insurance is that you cannot over recover and, as such, where reinsurance has the potential to do this there must be benefit rules, which by default define the precedence sequence.
Unfortunately, it is still common to come across reinsurance technicians who decide the precedence sequence on an event by event basis in order to maximise the recoveries. If the reinsurers were aware that it was down to the technician as to whether they were liable or not, what action would they be taking? It also makes it difficult to automate the recoveries without intervention by the technician each time a new event is processed.
One example of a simple situation is where a contract has a loss warranty. The normal rule is that the contract with the larger loss warranty benefits the contract with the smaller or no loss warranty. If, however, the contract with the larger warranty has a wider scope in terms of the accounts (lines of business) protected, the normal rule would be that the contract with the narrower scope benefits the contract with the wider scope. This simple situation is often easily resolved but there can be more complex situations.
Also, because these contracts are only being looked at when there are claims, the underwriter and broker who designed and placed the RI programme are no longer available to ask. This underlines how important it is that with an outwards reinsurance system all the rules are captured each year as the reinsurance programme is entered into the system; the benefit rules and, as such, the precedence sequence are defined and the programme tested using realistic data scenarios.
Tags: EL, excess of loss, precedence sequence, Reinsurance