Basics of Green Card Reinsurance - Bosna RE

gGE FrankonaReBasics of Green Card ReinsuranceSarajevo, 8th March 2001

Basics of Green Card Reinsurance1st alternative:Reinsurance on the basis of Quota ShareExample:•40 % RetentionPremium•60 % CessionLosses60 % ceded60 % ceded40 % retained40 % retainedgGE Frankona Re-2 -

Basics of Green Card ReinsuranceQuota Share Characteristics (Example)1. Retention : 40 % of claims and losses2. Cession: 60 % of claims and losses3. Commission : e.g.25 % of ceded premium payable to the Reinsured4. Cash loss: Amount exceeding USD x5. Accounts: Quarterly within 6 weeks. Confirmation within 2 weeks afterreception. Settlement within 2 weeks after confirmation.gGE Frankona Re-3 -

Basics of Green Card ReinsuranceAdvantage ofQ/S treaty forReinsuredDisadvantage ofQ/S treaty forReinsured•Replacement ofcapital (solvency ratio)•Significant amount ofpremium ceded toReinsurers•Reinsurance premiumis payable in arrearsgGE Frankona Re-4 -

Basics of Green Card ReinsurancePrinciple:2nd alternative:Excess of Loss (XOL) ReinsuranceReinsurer takes over the part of a losswhich exceeds the (pre-defined)deductibleExample:Loss: 796.432Reinsurer =596.432gGE Frankona ReDeductible =200.000 = Retention ofReinsured of everyloss-5 -

Basics of Green Card ReinsuranceXOL Characteristics (Example)1. Limit : in Green Card XOL by definition always “unlimited”2. Deductible: USD 200.0003. Based on the loss history of the specific portfolio, the Reinsurerquotes (calculates) a reinsurance premium. The reinsurance premiumis expressed as a % of the Subject Premium Income (SUPI).gGE Frankona Re-6 -

Basics of Green Card ReinsuranceXOL Characteristics (Example)4. Definition of SUPI:• Gross (Green Card premium before deduction of brokerage,commission)• Net (Green Card premium net of reinsurance premium inuring to thebenefit of this cover)• Premium income (Collected premium income attributable to thereinsurance period)gGE Frankona Re-7 -

Basics of Green Card ReinsuranceXOL Characteristics (Example)It is important that both Reinsured and Reinsurers have the sameunderstanding of the SUPI definition. Since in Bosnia Green Card isissued together with the domestic Motor Third Party Liability (TPL) policythe SUPI here is the total Motor TPL Premium. In other countries, e.g.Romania Green Card policies are issued independently from the domesticMotor TPL policy and therefore only the Green Card premium representsthe SUPI.5. Basis of cover: Losses occurring during the reinsurance periodgGE Frankona Re-8 -

Basics of Green Card ReinsuranceXOL Characteristics (Example)6. Reinsurance Premium• The Reinsured estimates an “Estimated Premium Income” for thereinsurance period to come for quotation purpose.• The Reinsurer quotes a reinsurance premium expressed as a % rateof the SUPI (= EPI)• During the reinsurance year: the Reinsured pays a Minimum & DepositPremium (M&D) on a quarterly basis in advance and in equalinstallments to the Retrocessionaire. Standard: 1. Jan., 1. Apr., 1. Julyand 1. Oct.gGE Frankona Re-9 -

Basics of Green Card ReinsuranceSpecific XOL Clauses1. Index clause:• Green Card is a long-tail line of business.• Index clause aims to keep the level of the deductible at the time ofloss settlement as originally agreed.• How : by indexing the deductible and the limit with an index agreed inadvance (usually wage or consumer price index).• The index to be used is the respective index of the country where theloss occurred.gGE Frankona Re- 12 -

Basics of Green Card Reinsurance1. Index clause (continued) :Example A:Payment dateUnindexedpaymentIndex16.5.96 455.673 132 455.67328.8.98 323.432 144 276.26512.7.00 223.555 151 182.101T otal 1.002.660 914.039Outstanding losses: nilIndexed paymentIndexation of deductible: 1.002.660 * 200.000 = 219.391914.039Reinsurance recovery: 1.002.660 less 219.391 = 783.269gGE Frankona Re- 14 -

Basics of Green Card Reinsurance1. Index clause (continued) :Example B :Payment dateUnindexedpaymentIndex16.5.96 455.673 132 455.67328.8.98 323.432 144 276.265I ndexed paymentT otal 779.105 731.938Outstanding loss: DEM 250.000Indexation of deductible: 779.105 * 200.000 = 212.888731.938Reinsurance recovery: 779.105 less 212.888 = 566.217gGE Frankona Re- 15 -

Basics of Green Card ReinsuranceSpecific XOL Clauses2. Ultimate Net Loss ClauseDefines what constitutes the loss amount recoverable under the cover:Recoverable:Deductions:- all loss payments- all loss adjustment payments- all recoveries, claims and salvages from otherreinsurance protections which inure to the benefitof this cover- salaries of employees and office expensesgGE Frankona Re- 16 -

Basics of Green Card ReinsuranceSpecific XOL Clauses3. Net Retained Lines ClauseDefines what constitutes the ultimate net loss amount recoverable under the cover:1) only that part of a loss which the company retains net (after any priority reinsurancecessions) for its own account2) the liability of the reinsurer shall not be increased due to one of the following reasons:- reinsured’s error or omission resulting in an increased net retention; e.g. wrong reinsurancecoding in the reinsured’s books- nor by a failure of the reinsured to reinsure according to its normal practice, e.g. reinsuredhas not bound the risk in his books into a priority cession- nor by the fact that the reinsured can not recover a loss from another reinsurer participatingin this cover.gGE Frankona Re- 17 -

Basics of Green Card ReinsuranceSpecific XOL Clauses4. Currency Fluctuation Clausehandles losses occurred in a currency other than the contract currency(DEM). All paid loss amounts shall be converted into DEM at the rate ofexchange of the settlement date.gGE Frankona Re- 18 -

Basics of Green Card ReinsuranceLondon Agreement1) Legal and organizational bases for the London Agreement of19/20 October 1989• UNO recommendations of 1949 and 1984 and theMultilateral Guarantee Agreement of 15 March 1991• EEC Guideline of 24 April 1972or relevant future international agreementgGE Frankona Re- 19 -

London agreementPurposes of the agreement:To realize a European internal market by facilitating the free traffic ofpersons, goods and services in Europe.To provide comprehensive protection for victims of traffic accidents byensuring that motor vehicles normally used in one country have adequateinsurance protection when visiting another country.gGE Frankona Re- 20 -

London agreementThe International Green Insurance Card guarantees that claims will beadjusted in accordance with the compulsory insurance of the host country.Within the scope of application of the Multilateral Guarantee Agreement,this card is superseded by the official registration.gGE Frankona Re- 21 -

London agreementThe body responsible for administering and applying the London Agreement isthe Council of Bureaux.In the individual member countries, the national GreenCard Bureaux are responsible for implementing theLondon Agreement as aHandling bureau:established by motor liability insurers, recognized by the government andresponsible for adjusting claims to indemnification within the respective countryas prescribed by this agreementgGE Frankona Re- 22 -

London agreementPaying bureau:responsible for issuing Green Cards and fulfilling the concomitantobligations vis-á-vis the handling bureaugGE Frankona Re- 23 -

London agreementRights and obligations of the handling bureau:• To clarify the circumstances of accidents and allocate liability• To inform the paying bureau and act in its best interest, yet in conformitywith the relevant law of its country• To exercise exclusive competence in applying and interpreting the law ofits countrygGE Frankona Re- 24 -

London agreement• To exercise unrestricted authority in adjusting claims falling within thepurview of compulsory insurance• To fulfill its obligation to consult and reach agreement with the payingbureau regarding the adjustment of claims that exceed the conditions orminimum sums insured stipulated by the law governing compulsoryinsurancegGE Frankona Re- 25 -