16

Pricing

by Jean F. Webb IV*

     This chapter examines commission and rating, those contractual mechanisms that determine the amount of consideration paid to the reinsurer for providing protection under a particular reinsurance, especially property reinsurance.+ It should be noted that this payment is not necessarily the ultimate cost of the reinsurance. Cost should be measured after deducting not only commission, if any, from the premium but also deducting other monetary benefits to the ceding company, not the least of which would be losses recovered from the reinsurer.  Three additional topics — loss corridors, funded covers, and reinstatements — will be covered because they are so closely related to the main chapter topics. All topics are illustrated by twenty-seven sample clauses.

     Because the commission and rating sections of a contract are con-cerned with discrete and reasonably unambiguous terms such as numbers, percentages, and formulae, they are typically shorter, more straightforward, and less complex than other contract clauses. This is particularly true if the definitions of the terms used appear elsewhere in the document in a separate Definitions article.

     Even though reinsurance historically has not been regulated as to rate, only a small number of rating methods and commission formulae have evolved to serve as the pricing basis for the reinsurance types currently in use. This absence of rate regulation has allowed reinsurers greater flexibility to tailor rates and commissions to meet the specific needs of individual cedents. The result is a bouquet of infinite varia- tions on a few common themes.

     One cannot emphasize too strongly the need to define the terms used in order to avoid confusion. Every teacher has learned that if a student can misinterpret an examination question, the student will. In reinsurance contracts, as in all contracts, any ambiguity will be interpreted by a court to the detriment of the party which drafted the contract!


* CPCU, Retired Senior Vice President and Director, Property Treaty Department,PRUDENTIAL REINSURANCE COMPANY, 1 Nostrand Road, Cranbury, New Jersey 08512. An autobiography follows the chapter.

+ Additional information on pricing casualty reinsurance appears in the chapter on casualty excess of loss.

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