How non-proportional reinsurance works

In non-proportional reinsurance, premium shares and loss shares are not linked. The reinsurer is liable only for the part of a loss that exceeds a pre-set amount, the priority (the cedent's retention), and only up to the limit. Everything below the priority the cedent pays itself. The reinsurer prices the premium separately, based on loss statistics, models and expert judgment, most often as a percentage of the portfolio premium.

For example, under a treaty of "RUB 100 million excess of RUB 20 million", a loss of RUB 15 million stays entirely with the insurer; on a loss of RUB 70 million the reinsurer pays RUB 50 million; on a loss of RUB 150 million it pays RUB 100 million, and the rest falls back on the cedent or the next layer of protection.

Main forms

  • Per risk excess of loss (per risk XL) protects against a large loss on a single asset.
  • Per event excess of loss (catastrophe, cat XL) covers the total of losses under many policies from a single event: a flood, windstorm or earthquake. The duration of an event is limited by an hours clause, for example 72 hours for a storm.
  • Aggregate excess of loss responds when total losses for a period exceed a threshold.
  • Stop loss protects if the portfolio's annual loss ratio exceeds an agreed level.

Layers, reinstatements and price

Large programs are split into layers: the bottom layer is hit more often and costs more, the upper layers are hit less often and are cheaper relative to their limit. After a payment, the limit can be reinstated for an additional premium; the number of reinstatements is fixed in the treaty. Pricing uses the burning cost method (based on actual past losses), exposure rating and catastrophe modeling. Rate on line, the ratio of premium to limit, helps compare layers with each other.

How to choose the priority and limit

The priority is set according to the loss the insurer is prepared to absorb from its own funds without harming its regulatory ratios and annual result. The higher the priority, the cheaper the cover, but the more losses remain with the cedent. The limit of a catastrophe treaty is chosen based on the estimated loss from a rare event, for example one expected once in a hundred or two hundred years, taking into account the accumulation of values in exposed zones. For protection against a single large risk, the benchmarks are the maximum sum insured in the portfolio and probable maximum loss estimates for the largest assets.

It is useful to look at the program as a whole: how the layers respond under different scenarios, what reinstatements cost and what happens if two major events occur in one year.

When non-proportional protection is chosen

  • The insurer wants to keep the profitable frequency of small losses and protect itself only against large ones.
  • The impact of catastrophes on capital and the annual result needs to be capped.
  • The portfolio is heterogeneous, and proportional cession is too expensive.
  • Liability lines can produce rare but very large claims.

Non-proportional protection is often placed on top of proportional cover: the quota share relieves the portfolio, and the catastrophe excess of loss protects the insurer's retention. It is arranged either as a treaty or as facultative cover for an individual risk.

Practice in Russia

For Russian property portfolios, the significant perils are spring floods and inundation, windstorms, major fires and, in seismic areas, earthquakes. Catastrophe treaties require good data on the addresses and values of insured assets. JSC RNRC, founded by the Bank of Russia, participates in programs: the law requires insurers to offer it a share of the risks they cede to reinsurance (50% of the ceded obligations as a general rule). Since 2022, Western capacity for Russian catastrophe risks has shrunk, so insurers more often raise priorities, buy lower limits and bring in Russian reinsurers and companies from countries that have not joined the sanctions.

What matters

  • The definitions of "ultimate net loss" and "event": they determine how much the reinsurer will pay.
  • Indexation of the priority and limit for inflation, especially in liability lines.
  • Exclusions: war, terrorism, sanctions-related, cyber and nuclear risks.

How Polis Re helps

Polis Re specialists help choose the priority and limit, prepare data for pricing, compare offers by layer and support placement through reinsurers and reinsurance intermediaries. Definitions are in the insurance glossary; to discuss protection, submit a request.