Reinsurance Programme Design and Retentions
IC-81 tests how an insurer combines treaties into a coherent programme. Programme design balances capital, risk appetite, volatility, regulatory retention rules and reinsurance cost. A good programme has no unintended gaps and no duplicate recoveries.
Design rules
- Set retentions by line of business from capital, solvency, earnings volatility and risk concentration.
- Use quota share for new or capital-intensive portfolios and for underwriting support.
- Use surplus for large single risks and facultative for risks outside treaty scope.
- Use catastrophe excess of loss for accumulation and clash exposures.
- Check that proportional capacity plus retention covers the largest policy the insurer intends to write.
- Price the programme on expected recoveries, reinstatement cost and reinsurer security, not premium alone.
Worked example
A property programme has a retention of INR 5 crore, a nine-line surplus treaty giving INR 45 crore capacity, and a catastrophe excess of loss of INR 20 crore excess of INR 5 crore. A single INR 50 crore risk is fully covered: INR 5 crore retained and INR 45 crore ceded. A catastrophe produces two INR 40 crore losses. Each risk cedes INR 35 crore and leaves INR 5 crore net, so combined net loss is INR 10 crore. The catastrophe cover pays INR 5 crore, being the amount above the INR 5 crore event retention, subject to its limit.
Traps
Do not leave a gap between surplus capacity and the largest policy. Do not buy catastrophe cover below the net retention left after proportional cession. Do not assume facultative cover is automatic. Do not ignore reinstatement cost in the programme budget.