Reinsurance pricing

Category: Reinsurance pricing · Reviewed by Taylor Watts, Broker · New Business · Last reviewed

Reinsurance pricing

Reinsurance pricing is the actuarial and underwriting discipline of setting the premium for a reinsurance contract — proportional or non-proportional, treaty or facultative — based on the expected losses, structural features and market context.

Generic approach

Indicated premium = Expected losses + Risk margin + Brokerage and frictional costs + Cost of capital + Profit loading

The expected loss component dominates in working layers; the cost of capital and profit loading dominate in catastrophe layers where expected loss is small.

Methods

• Burning cost — historical losses to the layer divided by exposure (working layers, credible experience).
• Exposure rating — applied to the ceded exposure using industry-derived size-of-loss curves (cat layers, new lines, low credibility).
• Frequency-severity simulation — Monte Carlo of claim count and size combined (large account, complex programmes).
• Catastrophe model — vendor cat model output (property cat, marine cat, terror).
• Experience credibility — blend of burning cost and exposure rating.

Layered pricing

For a multi-layer programme:

1. Working layer (e.g. £1m xs £5m) — burning cost dominant; profitable for both sides.
2. Middle layer (e.g. £10m xs £10m) — credibility-weighted burning cost and exposure rate.
3. Top layer (e.g. £50m xs £50m) — exposure rate dominant; cat model output for nat-cat layers.

Reinstatements

Most non-proportional layers permit reinstatement of cover after a loss, against a paid premium (“reinstatement premium”). The number of reinstatements, the cost, and any aggregate limit materially affect the layer’s cost-of-capital loading.

References

• Swiss Re. Pricing methods in non-proportional reinsurance.
• IFoA. Practical Guide to Reinsurance.
• Lloyd’s Underwriting Standards — Reinsurance.

Cross-references

• Excess of loss pricing
• Quota share pricing
• Burning cost reinsurance
• Exposure rating

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Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.