27 October 2020 2 min read

What is pricing?

Reinsurance tutorials #7 • The Basics

What is pricing?

Everything has a Price, but Price is not everything. 


As an insurance company, you deliver covers through insurance policies to your clients according to tariffs which take into account:

  • Probability of claims to occur, potential cost and recurrence period, experience with a given client or line of business.
  • Your acquisition costs (a commission to the agents or brokers, who bring you insured customers along with their premiums, and if you work on a direct/digital basis this includes advertising, call centers, IT systems, and so on).
  • Your management costs (employees to calculate the tariffs, risk surveyors, handling of policies, of claims...).
  • The service you deliver with an expected profit margin.
  • This profit margin may be eroded by high competition, the so-called soft market, unexpected deviation of losses in frequency and/or severity, hence the need for reinsurance.

For reinsurers, it’s very similar. Our premium producers are the insurance companies, we share their costs by paying:

  • Commission:  a fixed or scaled one depending on the loss ratio (% of claims to the premiums). The size of the commission will depend on your results, negotiations, state of the market... 
  • Overriding commission in view of good results or to support the building up of a new book involving extra costs this is supposed to disappear with the growth of the book.
  • Profit commission: to pay back part of the net profit ceded after deducting a negotiated % for your own management costs.
  • On the other hand, should the business be unprofitable, reinsurers may ask for reduced commission, loss participation clause, loss corridor or loss cap.
  • Premium reserve: The insurer writes policies, usually for 12 months, throughout the entire year. By the end of the year, a large part of the risks are still due to run the following year. He then has to make a reserve in his balance sheet called ‘unearned premium reserve’. He may ask a similar reserve to the reinsurer for his share of the premium. In some markets, more concerned with the outflow of cash, it is even compulsory.
  • Loss reserve: Same principle. By the end of the year, the insurer has claims not yet paid, but that will be the following year or even later on. He has to make reserves for these claims and may ask his reinsurers to deposit their share of the outstanding losses.
  • Issues: A high rated reinsurer may argue that his ability to pay is beyond any doubt. If it is required by local legislation, the reinsurer will then ask an interest on the deposit retained for had he got the money, he would have invested it and got a yield on it.

Price is not everything! It depends entirely on: the quality of your reinsurer, his security, his ability to pay, his service ability in many aspects linked with your global activity (building of tariffs, risk assessment, claims handling, etc.).

Depending on your priorities, your short term price, or long term partnership, security, and anything in between. 





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