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16. Reinsurance Commission Commission is paid by the reinsurer to the Cedant on premiums ceded. In principle Reinsurance commission should be sufficient to cover the original commission, plus the cedant’s Management expenses, but the margin is also tied to the performance of the portfolio (and the negotiation skills of the broker involved). Commission rate is agreed upon by the parties at the time of negotiating terms of the treaty. Main Types of Commission are: Flat Commission Profit Commission (over and above the Flat Commission) Sliding Scale Commission

17. Sliding Scale Commission This is a performance based Commission which allows for downward adjustment of Commission on posting a high loss ratio; and also provides for a higher Commission for good results. A Provisional Commission, which is normally the mid point between the Commission scale, is payable before the year end adjustment adjustment of the Commission

18. Loss Ratio Commission 61.00% and more 27.50% 59.50% and more but less than 61.00% 28.50% 58.00% and more but less than 59.50% 29.50% 56.50% and more but less than 58.00% 30.50% 55.00% and more but less than 56.50% 31.50% 53.50% and more but less than 55.00% 32.50% 52.00% and more but less than 53.50% 33.50% 50.50% and more but less than 52.00% 34.50% 49.00% and more but less than 50.50% 35.50% 47.50% and more but less than 49.00% 36.50% 46.00% and more but less than 47.50% 37.50% 44.50% and more but less than 46.00% 38.50% 43.00% and more but less than 44.50% 39.50% 41.50% and more but less than 43.00% 40.50% 40.00% and more but less than 41.50% 41.50% 38.50% and more but less than 40.00% 42.50% 37.00% and more but less than 38.50% 43.50% 35.50% and more but less than 37.00% 44.50% 34.00% and more but less than 35.50% 45.50% 32.50% and more but less than 34.00% 46.50% but less than 32.50% 47.50% Provisional commission: 37.50%

19. Profit Commission A percentage of the earned profits which the reinsurer agrees to pay in addition to the Flat Commission that would already have been awarded. Formula takes into account the Reinsurers’ Management expenses margin (normally 7,5%) and the treaty’s possible deficits from prior years.

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23. Limits

24. Limits This specifies the point at which the reinsurer becomes liable and the amount for which the reinsurer is liable. Limits are typically expressed as follows: “Limit: R 3,500,000 Ultimate Net Loss each and every loss each and every risk, each and every occurrence or series of loss occurrences arising out of one event. Deductible: R 3,500,000 Ultimate Net Loss each and every loss each and every risk, each and every occurrence or series of loss occurrences arising out of one event.” The above statement means that the Reinsurers will pay up to R3,5m in excess of the first R3,5m payable by the Reinsured for each loss occurrence. Normally cover is arranged in various layers, primarily for pricing purposes.

25. Gross Net Premium Income (GNPI) This is the amount against which Excess of Loss rates are based, to derive the reinsurance Premiums. Pricing is initially based on the Estimated GNPI (EGNPI) and then adjusted after the close of the year, when the Actual GNPI is known. The EGNPI figure not only provides the basis of calculation of premiums, but also gives the reinsurer a feeling of exposure it is assuming under an excess of loss treaty.

26. Premium Amount Minimum and Deposit premiums are payable, normally to be paid quarterly or half yearly in advance, during the year. The Minimum and Deposit Premium charged is arrived at as follows: % Rate Quoted X EGNPI X 90%. Purpose of the 90% margin is to provide leeway for the possibility that the EGNPI may not be achieved. After the end of the year, additional premium is payable if the Actual GNPI exceeds 90% of the EGNPI. Reinsurers argue that a Minimum Premium ensures that: the ceding company does not deliberately overstate its EGNPI (to achieve lower rates) and the reinsurer receives a guaranteed premium to meet its expenses and to cover the liability it has assumed.

27. Reinstatements Apart from the Monetary Limits given per layer, the amount of cover under an excess of loss treaty is limited in terms of the aggregate amount that is recoverable per layer. For example, if a layer of 7m Excess of 3m provides for 3 Reinstatements, the total amount recoverable under the layer is 28m ie the 3 x 7m reinstatements + the 7m cover. In most cases Reinstatements are provided at an additional premium Pro Rata to the amount recoverable and based on a stated margin of the premium to the layer. The Reinstatements clause could read as follows: “First reinstatement free, Second reinstatement at 50% additional premium and Third reinstatement at 100% additional premium; all pro-rata to amount only”.

28. Stability or Index Clause Some claims, particularly long tail, are affected by inflation and (both CPI and potentially court award inflation) claims. The Stability or Index Clause is a method designed to ensure that the Limits of cover are maintained at the same intrinsic value applicable when cover commenced irrespective of the effects of inflation over a period of time.

29. Loss Advice / Recovery Unlike Proportional treaty claims that can be set off against premiums due, XOL claims are reported and recovered individually. Reporting of XOL claims must not just be at the time of requesting payment but instead should be advised to the reinsurers as soon as possible after original claim is known or reported. This would also apply to all interim updates on the outstanding estimate until claim amount is finalised.

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31. Spread risk Write larger portfolios of risks Encourage reciprocal business Reduce net expense levels if commission is generous. Disadvantages Cedes same proportion of low and high variance risks. Cedes same proportion of risk irrespective of size. Passes share of profit to reinsurer.

32. Purpose of Surplus Cover Enables insurer to write larger risks Enables insurer to fine-tune experience for the class concerned Popular for classes where a wide variation can occur in size of risks, e.g. commercial property. Disadvantages Administration more complicated Potential for human error especially facultative/obligation treaties.

33. Purpose of Excess of Loss Permit an insurer to accept risks that could lead to large claims. Reduce risk of insolvency from catastrophe, single large loss/ aggregation of claims Stabilise the technical results of the insurer by reducing claims fluctuations Lower capital required Disadvantages of Excess of Loss Profit to reinsurer Underwriting cycle Knowing at what level to buy and how much vertical coverage is required.

34. Munich Re Swiss Re Hannover Re Berkshire Hathaway Lloyd’s Everest Re XL Re Partner Re 19 new reinsurance companies setup in 2006 (predominately in Bermuda

35. Munich Re Swiss Re Hannover Re Africa Re Lloyd’s Everest Re foreign reinsurers e.g. Partner, Odyssey, R&V, Mitsui, Scor, Sirius New Entrants Korean Re, China Re, GIC India, Imperial Re, Bermudian Reinsurers.

36. Providing diversification against other worldwide exposures Currency (Rand value against US$, GBP) SA perceived to be low risk for major catastrophes e.g. earthquake Security rating of foreign reinsurers versus local reinsurers (restricted to country rating unless backed by parental guarantee) Potential FCR security of reinsurers complications for local reinsurers at a later date

37. Reserving Pricing Broking Cat Modelling