Reinsurance Tutorials #8 - Season 3
Hi everybody 👋
Today, and for the eighth Reinsurance Tutorials video of the season, we will talk about "How to calculate a premium : additional costs"
This subject will be addressed by CCR Re experts Perrine Carolo and François Cahu.
Let’s start! ⏬
[François Cahu] : Hello I am François Cahu, I am Senior Vice President Non-Life Treaties Central and Northern Europe.
[Perrine Carolo] : Hi, I am Perrine Carolo, I am Underwriter & Actuary on Life & Health France and Europe.
[François] : We are together today to see how to calculate a premium.
[Perrine] : There is “do and don’t”.
[François] : And you have to think about the additional costs.
[Perrine] : Let’s start with a definition of the pure premium (or net premium) : calculated according to actuarial methods, this part of the premium aims to cover the cost of the risk. It is usually calculated on the basis of historical claims data, or actuarial models.
[François] : To obtain the full reinsurance charged premium, various elements must be added, according to the contract features, and the underlying risks.
[François] : The reinsurer’s fees are used to cover operating costs, their value depends on profitability targets. They are defined by the reinsurer for all risks, but a differentiated approach per line of business can be determined.
[Perrine] : In proportional treaties, the reinsurance commission corresponds to the remuneration of the cedant. It is due by the reinsurer as a compensation of the insurer’s development and distribution costs of the insurance product. This commission is usually a percentage of the reinsurance premium, but can also depend directly on the insurer’s fees.
They can be fixed, or performance-based: here, the commission will increase if the loss ratio gets better, but decrease if the amounts of claims are higher than expected.
[François] : A broker can be part of the reinsurance deal. Brokerage fees are usually a percentage of the reinsurance premium.
[Perrine] : Depending on regulation for each risk and geographic area, some taxes may be applied. As an example, in France, health insurance products are subject to a 13% tax, which can be increased to 20% depending on the characteristics of the product.
[François] : In case of prepaid reinstatement, the reinsurance premium must include the cost of potential claims (prepaid reinstatement = reinstatement that does not lead to the payment of an extra premium to reinstate the cover).
[Perrine] : The treaty can include a NCB (Non Claim Bonus) clause: if no claim has occurred, during the validity period of the treaty, the reinsurance premium can be reduced by a contractually agreed percentage.
[François] : Last but not least, if there is a profit commission in the treaty, its cost must be included in the premium calculation. This profit commission can be included in proportional treaties: if there is a profit (if the reinsurance premium is higher than claims, the positive result is shared between insurer and reinsurer, based on a split contractually agreed. If the result is negative, no profit commission is due to the insurer, and the negative result is usually postponed to next year’s account which is called loss carry forward.
[Perrine] : This is already the end of the video.
[François] : Now, how to calculate a premium has no secret for you.
[Perrine] : Thanks a lot for watching us, goodbye.
Bye for now 👋
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