American Agricultural Insurance Company REINSURANCE BASICS A I CA

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1 American Agricultural Insurance Company REINSURANCE BASICS A I CA

2 REINSURANCE BASICS A I CA American Agricultural Insurance Company Suite 300W 1501 E Woodfield Rd Schaumburg, IL Suite 580 One Easton Oval Columbus, OH Third Edition 2006

3 Preface The purpose of this book is to introduce the reader to reinsurance and to American Agricultural Insurance Company (AAIC). It explains the principles of reinsurance and how it functions. Specific reference is made to reinsurance contracts written by AAIC, but this book is not intended to alter the meaning of any AAIC reinsurance agreements. AAIC commenced business May 18, 1948, with capital and surplus of approximately one million dollars sponsored by the Farm Bureau insurance companies and the American Farm Bureau Federation. For fifty-one years, AAIC existed primarily to reinsure Farm Bureau insurance companies. In 1999, AAIC purchased Nationwide Mutual Insurance Companyʼs Office of Reinsurance in Columbus, Ohio, and thereby acquired a substantial broker assumed book of domestic and international reinsurance. The AAIC Board of Directors is drawn from the Farm Bureau property-casualty insurance companies. An Advisory Committee made up of Farm Bureau property-casualty insurance company CEOs acts as an advisor to the AAIC Board of Directors. AAIC Mission Statement We exist to assist the Farm Bureau insurance companies achieve financial stability and growth through a long-term partnership based on mutual integrity and trust. AAIC Operating Principles Through our unique relationship with Farm Bureau insurance companies, we: Retain maximum feasible risk within the Farm Bureau family. Maintain internal expenses substantially below industry norms. Offer Farm Bureau insurance companies opportunities to assume reinsurance exposures through pool participation and direct placements. Facilitate the gathering and distribution of information pertaining to Farm Bureau insurance companies. Provide financial modeling, underwriting/claim reviews, seminars and workshops. Facilitate the cooperative efforts of Farm Bureau insurance companies by the use of advisory committees and coordinating: conferences, financial assistance, research and development, volume purchase discounts, company peer reviews, catastrophe claim assistance, technical assistance, and personnel openings. American Agricultural Insurance Company

4 Through a professional reinsurance staff that is customer focused, we: Service individual reinsurance needs in the best interest of the Farm Bureau insurance companies. Provide innovative and flexible products and services that are uniformly available. Use sound actuarial principles to price equitably and consistently based upon individual company experience and exposure. Set price for contracts to be self-supporting over time. Provide prompt and long-term collectability of claims. Manage risk so as to mitigate adverse short-term operating results. Maintain strong business relationships with key worldwide reinsurance markets and access their expertise. Continue long-term capital growth to meet ever-increasing capacity needs. Maintain a strong balance sheet through adequate reserves and high quality diversified investments. Examples of specific AAIC services to Farm Bureau insurance companies are: Managing reinsurance pools that allow the companies to combine and share premiums and losses for given classes of business, such as property catastrophe, thereby trading the volatility of a single stateʼs or regionʼs experience for the more stable results of a national or international spread. Preparing the Solvency Analysis and Financial Evaluation (SAFE) tests for the AAIC Advisory Committee that give each Farm Bureau company an early warning of adverse financial trends. Coordinating and leading Company Peer Reviews (CPRs) when requested. A team of Farm Bureau insurance professionals reviews the operations of the host company for the purpose of exchanging ideas and suggesting improvements. Publishing an annual Operating and Financial Indicators booklet of operating results and other Farm Bureau insurance company statistical data. Publishing several newsletters and special interest legal research. Maintaining a website (www.aaic.com) with Farm Bureau insurance employee access to contracts, claims billings, property reinsurance submissions, presentations, AAIC and Farm Bureau insurance financials, Farm Bureau directories, etc. Coordinating catastrophe claims assistance when a company suffers catastrophic loss. Catastrophe modeling. Providing companies the opportunity to participate in group purchases of goods and services at discounted prices. Performing Claims and Underwriting Reviews. Facilitating conferences and other educational functions such as reinsurance seminars and PRISMS classes. Reinsurance Basics

5 Table of Contents What is Reinsurance?...1 Types of Reinsurance Agreements...2 Property Reinsurance Quota Share...4 Surplus Share...5 Excess...6 Catastrophe Covers...7 Occurrence Catastrophe...8 Aggregate Catastrophe...9 Catastrophe Modeling...10 Casualty Reinsurance Excess Liability Agreement...11 Quota Share Umbrella...13 Excess Umbrella...14 Farm Pollution...15 Professional Liability...15 Crop Reinsurance Crop Hail...16 Multiple Peril Crop...17 Reinsurance Ratemaking...18 Reinsurance Contracts...21 Reinsurance Pools...25 Conclusion...27 American Agricultural Insurance Company

6 What is Reinsurance? Reinsurance is a form of insurance: risk transfer for a premium. The terms of the transfer are set out in a contract between the reinsurer (who assumes the risk) and the reinsured company (who cedes the risk). The reinsured company is also referred to as the primary insurer or the ceding company. The primary insurer pays a premium to the reinsurer. In return, the reinsurer agrees to pay a portion of losses occurring under covered policies issued by the primary insurer. Ideally, the relationship between reinsurer and the primary insurer will be longterm and beneficial for both. The primary insurer wants reinsurance at a reasonable cost; the reinsurer wants to collect sufficient premium to cover expenses, any claims, and some profit. Both companies must feel comfortable with each other. Their relationship is based on utmost good faith, i.e. honesty and full disclosure of circumstances relating to the risk transferred. The reinsurer needs to have confidence in the underwriting and claims handling practices of the primary insurer. If that confidence exists, then the reinsurer will generally follow the fortunes of the primary insurer when losses occur. The primary insurer expects the reinsurer to be able to respond promptly when claims are made or other assistance is needed. Reinsurance serves many purposes. The most common purposes are: To provide capacity: A primary insurer may feel uncomfortable writing large risks. It can cede (transfer) some of the risk to a reinsurer. To promote financial stability: Frequency and severity of losses may fluctuate during any period. Reinsurance has a leveling effect on financial results. To protect against catastrophe: The accumulation of losses from major occurrences, such as storms, is a concern for most insurers. Reinsurance allows transfer of some of the risk, thereby softening the financial impact of catastrophic loss. To provide surplus relief: Risk can be transferred to a reinsurer enabling a primary insurer to write more business without adversely impacting its premium-to-surplus ratio. A reinsurer may pay ceding commissions to a primary insurer to cover some costs. To facilitate acquisition of a new line of business with which the primary insurer is not familiar. In addition to sharing in the losses, a reinsurer can provide expertise in underwriting and claims. To allow a primary insurer to cut off exposure on an existing line of business or in a geographic area. Reinsurance can be purchased to cover discontinued operations. To gain access to a reinsurerʼs expertise in underwriting, claims, accounting and actuarial. American Agricultural Insurance Company 1

7 Types of Reinsurance Agreements There are two general types of reinsurance agreements: Facultative: Individual risks are submitted to a reinsurer for consideration. Coverage terms and conditions are negotiated. The primary insurer has no obligation to cede the risk and the reinsurer has no obligation to accept the risk. Treaty: Covers an entire book of business. All risks falling within the scope of the agreement must be ceded by the primary insurer and must be accepted by the reinsurer. Coverage is automatic. It envisions a longterm relationship. Reinsurance agreements operate as proportional or excess: Proportional, or pro rata, reinsurance involves the primary insurer sharing premiums and losses with the reinsurer in the same predetermined percentage on every risk covered by the agreement. The percentage of the total loss paid by the reinsurer is derived from the percentage of the total premium that was ceded to the reinsurer. Excess reinsurance is non-proportional. When a reinsurance agreement is described as excess, it always means excess of loss. The primary insurer retains losses up to a certain amount (its retention), and the reinsurer pays up to 100% of the excess loss subject to a maximum limit of liability. Unlike proportional agreements, there is no correlation between the percentage of the total premium ceded to the reinsurer and the percentage of the loss the reinsurer pays. 2 Reinsurance Basics

8 Property Reinsurance Property Reinsurance is written as either a working cover or catastrophe cover. The reinsurance agreements cover a specified book of business subject to excluded exposures. Working Covers apply to everyday (higher frequency, lower severity) losses on individual risks. This is the level of losses a primary insurer expects to occur within a book of business based on loss history and anticipated trends. Working covers can be proportional or excess, as described on the preceding page. Furthermore, Proportional property reinsurance can be either Quota Share or Surplus Share: Under Quota Share, premiums and losses are shared in the same predetermined proportion on every risk, regardless of risk size. With Surplus Share reinsurance, the size of the risk determines the sharing proportion. If the risk size exceeds a stated retention, then premiums and losses for a given risk are shared in the same proportion. The proportion varies by risk. No premiums or losses are shared on risks under a certain size (below the retention). Be careful not to confuse the surplus share retention described here with loss retention. The purpose of the surplus share retention is to establish the risk size that can be ceded to the surplus share agreement. Loss retention, on the other hand, is the amount of loss a primary insurer must retain under an excess reinsurance agreement (similar to a deductible). Catastrophe Covers most commonly apply to an accumulation of losses from a single event (occurrence basis). They can also cover against a series of events that accumulate throughout the year (stop-loss or aggregate basis). Catastrophe covers are always excess reinsurance. The following three pages give examples of Quota Share, Surplus Share and Excess reinsurance. American Agricultural Insurance Company 3

9 Quota Share Primary insurer retention: 70% Reinsurer participation: 30% Reinsurer limit of liability: $150,000 any one risk Primary Insurer Reinsurer 70% 30% With Quota Share reinsurance, a predetermined percentage of every risk is ceded to the treaty, and the reinsurer pays the primary insurer a commission on premium ceded. The reinsurer receives premiums and pays losses from the ground up equal to the percentage of liability that has been ceded on each and every risk. Losses may be limited on a per-occurrence and/or per-risk basis. Coparticipations by the primary insurer may also apply to further limit the reinsurerʼs exposure. Under the example shown above, the reinsurer would receive 30% of the premium and pay 30% of the loss on each risk ceded to the treaty, regardless of the size of the risk. Example 1 Losses on a $300,000 risk would be divided as follows: On a $10,000 loss, the primary insurer recovers $3,000. On a $100,000 loss, the recovery is $30,000. On a $300,000 (total) loss, the recovery is $90,000. Example 2 If the risk size was $500,000: On a $10,000 loss, the primary insurer recovers $3,000 (same as above). On a $100,000 loss, the recovery is $30,000 (same as above). A $500,000 (total) loss results in a $150,000 recovery. 4 Reinsurance Basics

10 Surplus Share $900,000 treaty limit with $100,000 retention With Surplus Share reinsurance, the primary insurer retains a fixed dollar amount of exposure on each risk ($100,000 in this example), and cedes the balance to the reinsurer. Example 1 Risk Size is $200,000 Primary insurer retains 50% ($100,000/$200,000) of the premium and cedes 50% to the reinsurer. Primary insurer retains 50% of any loss and the reinsurer pays 50%. The reinsurer would pay $25,000 on a $50,000 loss, $50,000 on a $100,000 loss, etc. Primary Insurer 50% Reinsurer 50% Example 2 Risk Size is $500,000 Primary Insurer Reinsurer Primary insurer retains 20% ($100,000/$500,000) of the premium and cedes 80% to the reinsurer. Primary insurer retains 20% of any loss and the reinsurer pays 80%. A $400,000 loss results in a $320,000 reinsurance recovery. 20% 80% Example 3 Primary Insurer Risk size is $50,000 Primary insurer retains the entire premium because the risk size is below the $100,000 retention. 100% Primary insurer pays the entire loss, should one occur. As with other proportional contracts, the net cost may be adjusted by fixed or sliding scale commissions, per occurrence or per risk loss limits, and/or coparticipations. To simplify ceding and loss recovery, AAIC uses risk size categories with ceding and recovery based on the average risk size in each category. American Agricultural Insurance Company 5

11 Excess Treaty limit: $900,000 Retention: $100,000 $900,000 $100,000 Reinsured Loss Retained Loss Excess reinsurance is only concerned with the amount of loss. In the above example $100,000 would be subtracted from each loss. The primary insurerʼs loss would have to exceed $100,000 before it could collect anything from its reinsurer. Example 1 Loss is $200,000 Primary insurer retains $100,000 $100,000 Reinsurer $100,000 Primary Insurer Reinsurer pays $100,000 Example 2 Loss is $1,000,000 Primary insurer retains $100,000 Reinsurer pays $900,000 Example 3 Loss is $50,000 Primary company retains $50,000 Reinsurer pays $0, since the loss did not exceed the $100,000 retention $900,000 $100,000 $50,000 Reinsurer Primary Insurer Primary Insurer These three examples assume the reinsurer pays 100 percent of the excess amount. Some agreements require the primary insurer to participate in the excess amount. 6 Reinsurance Basics

12 Catastrophe Covers Catastrophe reinsurance is always excess reinsurance. It protects against an accumulation of losses on multiple risks from a common cause, usually associated with a severe storm. Catastrophe covers may apply on an Occurrence or Aggregate basis. Occurrence Catastrophe reinsurance covers multiple losses from specific perils during a specific time period. The most common perils are windstorm and hail, which are often associated with hurricanes or tornados. The time period during which losses from these perils is covered under one occurrence is usually 72 hours. Other insured events such as flood, winter storm and earthquake have a 168-hour occurrence period. Loss payments are added together and other recoveries (salvage, other reinsurance, etc.) are deducted. If the remaining loss exceeds the per occurrence retention, the reinsurer pays the excess amount. The retention amount may be a percentage of the primary insurerʼs subject earned premium on reinsured risks, or it may be a fixed dollar amount. The primary insurer participates in the excess amount of loss, typically 5% - 10%. The cost of Occurrence Catastrophe reinsurance is based on loss experience, exposure, market conditions, and judgment. Judgment is involved due to low frequency and high severity of loss. It is important to determine whether past conditions reflect current coverage conditions. A claim reduces the amount of catastrophe coverage remaining, and it must be reinstated to provide the same coverage for a subsequent event. AAIC offers reinstatement covers to soften the financial burden of both retaining a portion of cat losses and paying additional premium when storms occur. Other cat coverage options available from AAIC include a no-claim bonus, profit sharing, and loss adjustment expense coverage. Retentions can also drop down once a certain level of damage is reached. Auto physical damage coverage can be written separately or combined with property coverage. Auto coverage inception and recovery can be indexed to the amount of property damage sustained. Aggregate (also called Loss Ratio or Stop Loss) reinsurance is written on an annual basis. It protects against the accumulation of losses during the entire year from a series of storms or other covered events, which may not be catastrophic occurrences individually. The primary insurer recovers after a) all other reinsurance recoveries are credited, and b) the retention is exceeded. The primary insurer also participates in loss above the retention, typically 5% - 10%. Examples of reinsurance recoveries under catastrophe covers are on the next two pages. American Agricultural Insurance Company 7

13 Occurrence Catastrophe Reinsurance $25,000,000 Treaty Limit: Reinsurance coverage purchased $20,000,000 NEP: Net Earned Premium on protected policies $2,000,000 Retention (10% of NEP) 5% Participation: Primary insurerʼs share of loss above retention $4,000,000 Losses from a Hurricane $500,000 Other Reinsurance Recoveries, e.g., Property Surplus Share $20,000 Salvage Recoveries $27,000,000 $2,000,000 Treaty Structure COVERED LOSS 95% RETENTION P A R T I C I P A T I O N 5% Calculations $4,000,000 Gross Loss - 520,000 Recoveries $3,480,000 Subject Loss - 2,000,000 Retention $1,480,000-74,000 Participation (5%) $1,406,000 Recoverable Loss (95%) 8 Reinsurance Basics

14 Aggregate (Stop Loss) Catastrophe Reinsurance $10,000,000 Treaty Limit $20,000,000 Subject Earned Premium (SEP) $7,000,000 Retention (35% of SEP) 10% Participation $25,000,000 Losses from Covered Perils $600,000 Property Surplus Share Recoveries on Covered Perils $8,000,000 Occurrence Catastrophe Reinsurance Recoveries Treaty Structure $17,000,000 $7,000,000 COVERED LOSS 90% RETENTION P A R T I C I P A T I O N 10% Calculations $25,000,000 Gross Loss - 600,000 Property Surplus Share Recoveries - 8,000,000 Occurrence Cat. Reins. Recoveries $16,400,000 Subject Loss -7,000,000 Retention $9,400, ,000 Participation (10%) $8,460,000 Recoverable Loss (90%) American Agricultural Insurance Company 9

15 Catastrophe Modeling Catastrophe modeling combines meteorological, engineering and insurance information to produce estimated insurance losses from catastrophic events. Catastrophe models predict all possible events that could happen. Examples of perils included are severe thunderstorms (tornados, hail and straight line winds), hurricanes and earthquake with fire following. The models are run on high-speed computers using the latest technology. For the models to predict insured loss for a company, they first simulate an event. The event generated is distinguished by peril, location and intensity. Once the event is identified, it is applied to company-specific exposure data. The exposure data can range from risk location to data aggregated to the county level. Building structure characteristics (e.g. age, construction and occupancy) are taken into consideration to calculate the damage to the structure from an event. An average value is assumed if the structure information is not in the company data. Once the loss to a structure is determined, the policy deductible and limit is applied to determine the insured loss. Losses for all insured structures are accumulated to obtain the insured loss for the event. The models simulate thousands of events. Return periods are calculated from these events. The return periods are the probability of an event of a given size or greater occurring. For example, the probability of a loss the size of the 100-year event or greater occurring is 1%. Companies can use the results of the models to assist in making underwriting decisions, formulating underwriting guidelines, managing aggregate exposures, developing rates and making reinsurance decisions. 10 Reinsurance Basics

16 Casualty Reinsurance Excess Liability Reinsurance Agreement Casualty treaties reinsure a primary insurerʼs liability policies. AAICʼs basic casualty treaty is called the Liability Excess of Loss Reinsurance Agreement. The types of policies it reinsures include Comprehensive Personal Liability, Farmers Comprehensive Liability, General Liability, and Automobile Liability. AAIC also writes a combination Excess Liability/Umbrella treaty that includes up to $5 million of Umbrella coverage. Workersʼ Compensation reinsurance can be included as a separate coverage with distinct terms or in combination with other casualty lines. Per Risk Property coverage can also be included to form a Multi- Line contract. Casualty treaties are generally written on an excess of loss basis for an occurrence. An occurrence includes all applicable policies for one or more involved insureds. Under an excess treaty, the insurance company retains a set dollar amount of each loss. The reinsurer pays 100% of the portion of Ultimate Net Loss that exceeds the retention. Payments included in the Ultimate Net Loss of an Excess Liability contract are liability, medical payments, uninsured and underinsured motorist, No- Fault/Personal Injury Protection, and allocated loss adjustment expenses. Any payment up to policy limits is 100% included, and currently Excess-of-Policy Limits (XPL) and Extra-Contractual-Obligation (ECO) payments are 90% included. Workersʼ Compensation includes payments for medical, lost wages and disability, and loss adjustment expense. The contract is divided into different layers as shown below. $21,900,000 CAPACITY LAYER $1,900,000 $400,000 WORKING LAYER RETENTION American Agricultural Insurance Company 11

17 Retention In the example shown, the primary insurer retains the first $400,000 of any loss covered under the treaty. Even if the total loss exceeds $400,000, the primary insurer receives no recovery for the first $400,000 under this treaty. As is true with all excess covers, most of a primary insurerʼs loss activity will occur within the retention layer. If a retention did not apply, the reinsurer would be obligated to reimburse the primary insurer from the first dollar of each loss. This would make the treaty much more costly to the primary insurer, as the reinsurer would need to increase the premium in order to cover losses in this layer. The premium charged is less when the primary insurer retains more loss. In addition, the retention guarantees that the primary insurer maintains a financial stake in the claim settlement, thereby encouraging it to investigate diligently and adjust claims economically. Working Layer The Working Layer is excess of the primary insurerʼs retention. The Working Layer is flat-rated based on exposure and experience. The rate is applied to the subject premium. A final adjustment is made at year-end when the actual subject premium is known. It is expected that the Working Layer will produce losses. The coverage limit for this layer normally coincides with the maximum policy limits written by the primary company. Capacity Layer The Capacity Layer is also called the Catastrophe, Excess Catastrophe or Clash Layer. It attaches above the Working Layer and covers exposure created when multiple insureds and/or policies are involved in an occurrence. It also covers situations where coverages such as UM/UIM are stacked or XPL and ECO are involved. While a catastrophic loss is easy to visualize for property exposures, it is not as obvious with casualty losses. One example is a single automobile accident involving more than one of the primary companyʼs insureds. The exposure can be far greater than the limits of a single policy. The capacity layer provides reinsurance protection for an accumulation of losses resulting from a single occurrence. In some states, auto No-Fault coverage is written without a limit, as is Workers' Compensation. Since there is no policy limit, a capacity cover is needed to cover losses with long-term disability, multiple employees, etc. 12 Reinsurance Basics

18 Umbrella Reinsurance (Quota Share Basis) Umbrella insurance policies provide excess liability coverage over primary underlying policies with required minimum limits. In some situations, the umbrella will also drop down to provide the primary coverage in excess of a stated self-insured retention (SIR). Umbrella policies are heavily reinsured because a primary insurer often has the underlying coverage as well, and thus would retain a substantial portion of the primary policy loss. Umbrella coverage in excess of $1,000,000 is usually 100% reinsured. Following is an example of an umbrella policy with the following attributes: $2,000,000 limit $500,000 underlying primary coverage 10% participation by primary insurer on 1 st million of umbrella coverage $2,500,000 UMBRELLA 2 ND MILLION REINSURED 100% $1,500,000 UMBRELLA 1 ST MILLION REINSURED 90% P A R T. 10% $500,000 UNDERLYING PRIMARY COVERAGE Loss Example Loss is $2,000,000 $500,000 covered by underlying primary policy Umbrella pays $1,400,000 of the $1,500,000 balance: $900,000 (90% of 1 st million) + $500,000 (100% of the balance) American Agricultural Insurance Company 13

19 Combined Excess Liability and Umbrella Farm Bureau companies can opt to have their umbrella policies reinsured through their Liability Excess of Loss Reinsurance Agreement instead of through the Quota Share program described on the preceding page. In this case, the umbrella policies would be reinsured on an excess basis. Umbrella policy losses would be ceded along with underlying primary policy losses to the Liability and Umbrella Excess of Loss Reinsurance Agreement. Pricing of the combined Liability and Umbrella Excess of Loss contract would be based on experience, limits profile and written premium. Since the umbrella is reinsured in an excess contract, American Ag would have no input into the umbrella rates charged by the primary insurer. However, American Ag would offer pricing assistance should the primary insurer request it. Advantages Primary insurer cedes less Umbrella premium to American Ag Primary insurer sets their Umbrella rates and underwriting guidelines A single retention would apply in a given occurrence Possible Disadvantage An Umbrella loss could adversely affect the experience of the entire Liability Excess of Loss Reinsurance Agreement, resulting in a higher reinsurance rate for the entire contract in following years. 14 Reinsurance Basics

20 Farm Pollution Liability Reinsurance AAIC formed the Farm Bureau Pollution Pool in 1987 for the purpose of reinsuring farm pollution liability policies written by Farm Bureau insurance companies. The policies provide a $1,000,000 per incident/aggregate policy limit with a $500 deductible. They cover bodily injury and property damage claims made by third-party claimants on a claims-made basis. Another form of coverage is by the Pollution Liability Endorsement to a Farm Liability policy that is reinsured under the Liability Excess of Loss Reinsurance Agreement. Several levels of coverage are available, including first party property cleanup. Loss experience is kept separate from other losses, and the reinsured company can select a retention from zero to 100%. Professional Liability Reinsurance AAIC reinsures two types of professional liability coverages written by Farm Bureau insurance companies. Insurance Agents Professional Liability protects insurance company agents for liability for errors of omission or commission in the performance of their duties. Insurance Company Professional Liability (ICPL) is reinsured under the Liability Excess of Loss contract for claims arising out of adjustment of losses otherwise covered under that contract. Other ICPL and Directors and Officers (D&O) Liability are not currently reinsured directly by AAIC, but AAIC facilitates this coverage for Farm Bureau companies through another insurer. D&O protects Farm Bureau corporate directors and officers for liability while acting in their official policy-making capacities. American Agricultural Insurance Company 15

21 Crop Hail Reinsurance Crop Hail insurance indemnifies a farmer when hail damages or destroys his crops. This is a line of business where the experience can be volatile. The key to underwriting Crop Hail insurance is to spread the risk. Spreading the risk can be accomplished by pooling. Participants cede business to a pool and assume a share of the pool experience. AAIC manages the Farm Bureau Crop Hail Reinsurance Pool. The pool cessions are based on liability within a township with details shown below. 1. Quota Share: The issuing company cedes a fixed 75% of its premium and liability to the pool. It assumes back 90% of the premium amount it cedes (AAIC assumes the other 10%). 2. First Surplus: The issuing company cedes 90% of its premiums and liability on a Surplus Share basis. It retains the other 10% net for its own account. 3. Second and Third Surplus: 100% of the premium and liability is ceded on a Surplus Share basis. 4. Aggregate Stop Loss: This protects the ceding companyʼs results when its loss ratio exceeds a certain attachment point on the business it retains. It covers 90% of the loss above the attachment point. A Typical Crop Hail Program $4,000,000 $2,500,000 $1,500,000 $500,000 Third Surplus 100% Ceded Second Surplus 100% Ceded First Surplus 90% Ceded Quota Share 75% Ceded 10% Retained 25% Retained 16 Reinsurance Basics

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