Erschienen in Ausgabe 4-2016Märkte & Vertrieb

270. Reinsurance commission

Von Keith PurvisVersicherungswirtschaft

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270. Reinsurance commission

For the share of each risk ceded under a proportional property reinsurance treaty a primary insurer pays a pro rata share of its gross premium, the reinsurer then being liable for the same proportion of claims. Because the insurer has incurred acquisition expenses and has administration expenses for the business, the reinsurer is obliged to cover these costs for its share of the risks. Negotiations on proportional treaties thus focus on the reinsurance commission, because this is how the reinsurer prices the business. [In non-proportional reinsurance there is no commission.]
It is important for the reinsurer to know the quality of the business, because it only has an underwriting profit if the combined ratio – the loss ratio plus insurer’s expenses – is less than one hundred percent. It is also highly desirable to have reliable information as to what the insurer’s expenses actually are. This is because an important principle of proportional reinsurance is to “follow the fortunes” [Schicksalsteilung], this principle naturally being restricted to the reinsured portfolio, not to the financial integrity of the company as a whole. If the reinsurance commission exceeds the actual expenses, the primary insurer will either make a larger profit or smaller loss than the reinsurer, and consequently it could afford to relax its underwriting standards. In practice, however, for reasons of competition reinsurance commissions in excess of insurers’ expenses are frequently granted, but this is only justifiable if the business is known to be good, to enable the reinsurer to make an acceptable return.
A common reason for preferring proportional to non-proportional reinsurance is that an insurer wants continuity of coverage, having a long term relationship with its reinsurer or reinsurers, with the possibility of adjusting the terms of the treaty annually. To this end proportional treaties often contain an element of profit sharing, a so-called profit commission. This means that in good years the reinsurer shares some of its profit with the primary insurer. From the reinsurer’s point of view this takes the pressure off the renewal negotiation following a very good year, which might otherwise focus on an increase in the reinsurance commission. However, the reinsurer will not share any profits with its cedant unless it has first covered its expenses, and the profit commission will stipulate that in bad years losses will be carried forward into future…