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Old 01-08-2014, 06:12 AM
ZActuary ZActuary is offline
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Default Queries with regard to Reinstatement Premium Recognition & UPR for Reinsurers

Hello All,

I have one query in concern with regard to the calculation of Premium Recognition & UPR for Reinsurers.

My thoughts are as follows:

For example: Suppose a cedant buying a reinsurance cover with one reinstatement premium from a company and they are paying $1m (I am assuming they are paying their premiums on a quarterly basis) reinsurance premium on 1 January 2014 for a $10m xs $10m risk XOL Layer. Suppose that 3months later on 1 April 2014, there is a total loss to this cover (layers).

Immediately prior to the loss, assuming uniform exposure to the risk across the year, the unearned premium reserve = 0.75 * $1m = $0.75m.

My questions are:
1) Once the loss has occured, the whole reinstatement premium = $1m that is to be paid by the cedant, are we (reinsurers) allocating / recognize the premium of $1m in our account, (which i think it is not material / right to our UW results, which we would get better UW results?)

2) or are we calculating unearned premium as before, but this time our exposure period is just the remaining 9 months on the contract. Are we allocating 0.75m as our UPR which is based on a pro - rata basis over the coverage period?

Is anyone here have any clues on my questions above? Any Insurers / Reinsurers' material pertaning to the above would be greatly appreciated? Thanks in advance.
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Old 01-08-2014, 08:01 AM
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MountainHawk MountainHawk is offline
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FAS 60 says:

Quote:
If, as is usually the case, the ultimate premium is reasonably estimable, the estimated ultimate premium shall be recognized as revenue over the period of the contract. The estimated ultimate premium shall be revised to reflect current experience.
To me, I would interpret that to mean you have 500K earned and 1500K unearned on 4/1/2014, but IAMAAcct.
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Old 01-09-2014, 08:50 PM
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Quote:
Originally Posted by MountainHawk View Post
FAS 60 says:



To me, I would interpret that to mean you have 500K earned and 1500K unearned on 4/1/2014, but IAMAAcct.
Yes agreed (as you have pretty good certainty the reinstatement is triggered and therefore must recognize it at that point), plus you have an additional cover reinstated. There is a paper by Ralph Blanchard that "may" cover this in principle, don't recall it exactly.
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Old 01-10-2014, 10:34 AM
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It depends on the clause of the reinstatement. It can be that it's 100% of the premium, or 100% of the premium proportional to the amount of time remaining of the treaty. The reinstatement premium is paid as the loss is paid by the reinsurer. ie, if on the first billing, the reinsurer pays $5m, 50% of the reinstatement premium will be due.

And BTW Reinsurers tend not to book any unearned premium for excess of loss premium. It's strange, but it's how it is.
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Old 01-10-2014, 11:03 AM
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Quote:
Originally Posted by yonatan View Post
It depends on the clause of the reinstatement. It can be that it's 100% of the premium, or 100% of the premium proportional to the amount of time remaining of the treaty. The reinstatement premium is paid as the loss is paid by the reinsurer. ie, if on the first billing, the reinsurer pays $5m, 50% of the reinstatement premium will be due.

And BTW Reinsurers tend not to book any unearned premium for excess of loss premium. It's strange, but it's how it is.
No UNearned premium? That just seems wrong.

Did you mean no EARNED premium? I could see an argument for not earning premium until expiration --- at least depending on the underlying exposure.
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Old 01-10-2014, 08:13 PM
Arlie_Proctor Arlie_Proctor is offline
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XOL contracts tend towards billings based on estimated or actual subject earned premium. Because the premium being remitted for the quarter or month is based on rate * subject base earned, there is no unearned premium at the end of the quarter on the reinsurer's books. That is not universally true, but the majority of XOL contracts I see are written that way in the US market.
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Old 01-20-2014, 04:25 AM
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Some guys set the UPR=1M*9/12+1M*9/9, while some others set UPR=1M*9/9 (The initial premium $1M is regarded as earned because a total limit has extinguished. If no reinstatement, the contract would have expired). The latter seems more reasonable.
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