Reinstatement Premium in Non-Proportional Reinsurance

Yesterday, I had given a problem related to claim recovery. I requested for responses either in comments or in my email. I did not receive any response.

I would request Chartered Insurance Institute to revise its course material to include practical claim calculations that Reinsurance practitioners need for their effective working.

Let us complicate that problem further by asking the reinstatement premium chargeable under the Risk XL & CAT XL. (presuming the rate on GNPI and GNPI are given).

Most of the reinsurance practitioners can easily calculate the total reinstatement premium. But in practice, after every recovery, reinstatement premium has to be calculated. Let us understand how this premium is calculated.

For the time being, let us forget reinsurance. Let’s consider direct insurance and assume it is a fire policy with following details:

Sum Insured = USD 100 m
Premium = USD 100.000
Period of Insurance = 1st Jan 2024 to 31st Dec 2024.
Date of Loss = 30th June 2024.
Assessed Loss = USD 50 m.

In a fire policy, the sum insured stands reduced after the loss. However, reinstatement premium is deducted from the claim. How much is the reinstatement premium?

Reinstatement Premium = USD 100,000 * (1/2)* (1/2) = USD 25.000.
First 1/2 is prorata with respect to amount
Second 1/2 is prorate with respect to time.

If we come to the non-proportional reinsurance, normally in most treaties, Pro-rata is with respect to amount and not with respect to time.

One common mistake many insurance/reinsurance practitioners commit is the claim after reduction of reinstatement premium is treated as final claim. In actual practice, the claim before deduction should go into the claim account and the reinstatement premium should go into the premium account.

Blog by Atmaram Cheruvu