Reinsurance, Capacity and Market Practice
Reinsurance, Capacity and Market Practice
This domain tests how cargo business is placed in the subscription market, how capacity is created and constrained, and how reinsurance responds.
Placement practice
Cargo is written in the London subscription market: a leader sets terms on a slip (now usually the Market Reform Contract), followers write lines expressed as percentages or fixed amounts, and the risk is bound when the required line is complete. Binders and coverholders allow delegated underwriting under defined limits and TOBAs. Capacity comes from syndicate capital, company capital and reinsurance; it is rationed through line sizes, and constrained by accumulation in ports, vessels or catastrophe zones.
Reinsurance structures
- Proportional: quota share (fixed percentage of all business) and surplus (percentage above a retained line), sharing premium and losses in proportion.
- Non-proportional: excess of loss per risk, per event or catastrophe, and aggregate stop loss, attaching above a retention with a stated limit and reinstatements (free or paid).
- Facultative for individual risks; treaty for a book; facultative obligatory and open covers sit between the two. Proportional treaties generally carry follow-the-settlements wording; non-proportional treaties rely on defined events, hours clauses and claims notification.
Worked example
An insurer writes a £10,000,000 cargo line and suffers a £3,000,000 loss in one event. It cedes 40% by quota share, so the reinsurer pays £1,200,000 and the net loss is £1,800,000. A per-event excess of loss treaty of £1,000,000 excess of £1,000,000 then responds: the net £1,800,000 exceeds the £1,000,000 retention, so £800,000 is recovered and the insurer retains £1,000,000. Premium falls: 40% of gross premium is ceded, and a paid reinstatement may be due if the treaty limit was partly exhausted.
Marks-losing traps
- Confusing per-risk with per-event or clash cover when a loss hits several assureds.
- Forgetting reinstatement premiums after a recovery.
- Assuming a quota share automatically lowers the excess of loss retention.
- Treating follow-the-fortunes as overriding the reinsurance wording.
- Ignoring that capacity is aggregated across a region, not per policy.