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Outline

The Pro Rata Property Treaty

ORIGINS AND FUNCTIONS OF TREATIES                          36

TYPES OF PRO RATA PROPERTY TREATIES                     39
     The Quota Share Treaty

          Benefits to the Ceding Company
               Replenish Policyholder Surplus
               Improve Financial Rating
               Encourage New Lines of Underwriting
               Afford Fronting
               Provide Catastrophe Protection
               Increase Net Insurance Liability Retention

          Variations and Exceptions
               Portfolio v. Running Account
               Net v. Gross Account

               The "Guaranteed-Profit" Quota Share Agreement
     The Surplus Share Treaty
          Definition
               Varying Percentages of Sharing
               Varying Obligatory Requirements
          Purpose
               Maximum Limit Per Risk
               Multiples of Net Retention

               Minimum Retention Required
          Advantages
          Second and Third Surplus Share
          Treaty Balance and Premium Volume Guidelines
PRICING                                                                                        56
     Flat Commission

     Contingent Commission
     Sliding Scale Commission
SIGNIFICANT CONCEPTS AND PRACTICES                      61
     The Transfer of Risk

     Retention Warranties
     Coverage and Limits
     Attachment of Liability
     Risk Definition
     Following Fortunes, Settlements, and Original Conditions
     Protecting the Surplus Treaty
     Reporting Transactions
     Termination
     Changes Caused by 1992's Hurricane Andrew

SUMMARY                                                                                  72

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The Pro Rata Property Treaty

by Jean F. Webb IV *

     It would be an unusual insurance company that did not need reinsurance to protect its financial resources from severe underwriting losses. Severe losses may arise from large insured risks or exposures, from risks of any size damaged in a common loss occurrence (i.e., a hurricane), or from high frequency of losses. The form and amount of reinsurance needed depend upon the size of the insurer, the nature of its book of business, and the type of loss exposure that is being addressed. For example, if a company is concerned that a few of its policies are written for amounts of insurance much larger than the rest of the company's policies, those larger policies might be individually reinsured by means of facultative certificates.

     A facultative certificate is sometimes referred to as a "reinsurance policy." The wording is somewhat standard in describing the reinsurance underwriter's commitment after the original risk and its exposures are appraised. Individual negotiation by insurer and reinsurer of each policy is necessary, with expensive duplication of the underwriting function. Accordingly, when large volumes of insurance policies need to be reinsured, insurers obtain most of their reinsurance through one or more reinsurance treaties.

     A treaty is a reinsurance agreement between the policy-issuing insurer and the reinsurer that covers many policies automatically. The policy-issuing insurer is also known by other names: the reinsured, the primary company (as the first in the insuring process), or in pro rata reinsurance where cessions are made, the ceding company or the cedent. A typical treaty will include as many as thirty or forty nonstandard clauses or articles, each necessary to describe 1) the class or classes of business being reinsured, 2) the type and amount of reinsurance . . .


* CPCU, Retired Senior Vice President, Treaty Property Department, Prudential Reinsurance Company (now EVEREST RE), 1 Nostrand Road, Cranbury NJ 08512. An autobiography follows the chapter, in which his additional services as coeditor of this and other books are noted. Mr. Webb would like to acknowledge the contribution of his long-time secretary at Pru Re, Joan Pfeifer, whose devotion to this project lasted long past his retirement.
     

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