Every answer and its explanation appears here once you have finished the path. Each one then links to the matching glossary entry, where the concept is set out in full with its worked example.
1. A cedant presents a base of two hundred and forty million at 2.8 percent, announcing a four percent price reduction at renewal. The reinsurer notes that the definition now excludes a subsidiary of thirty one million brought into scope last year. What becomes of the reduction?
It is far larger than stated: on a restated base the equivalent rate falls and the real cut approaches fifteen percent
The subject premium base is the cedant's premium volume to which the contractual rate applies in order to fix the reinsurance premium. Its definition is among the most technical and most disputed points of a treaty, because it decides what counts: gross premium or net of acquisition commission, net or not of cessions to other treaties, including or excluding taxes, management expenses, ancillary lines and inwards business from other insurers. The commonest formulation takes gross premium less only cessions to inuring reinsurers. The problem solved is commensurability, and it deserves to be taken seriously: a rate means nothing against a figure the two parties would define differently or that shifts from year to year. The case in the question gives the most useful demonstration. On an unchanged scope the base would be 271 million and the equivalent rate 2.48 percent: the headline four percent reduction is in reality a cut of about fifteen percent, and the difference comes from no negotiation but from a line of definition. This is why well drafted treaties define the base by reference to named accounting lines rather than by a general formula, and why comparing two rates without first comparing their bases is an exercise that measures nothing.
Glossary entry · assiette-de-primes2. A cedant states estimated premium income of ninety five million; the actual base reaches one hundred and twenty eight million. The treaty carried a variation clause beyond twenty percent, and the reinsurer raises its rate. What does that clause correct?
The gap between the exposure the price was set on and the one that actually turned up
Estimated premium income is the projection a cedant gives the reinsurer at placement, and on which the minimum and deposit premium is computed before the real base is known. It also drives the reinsurer's exposure analysis, which relates capacity sold to expected volume of business. The problem solved is pricing a year that has not happened: a price must be set and capacity committed in January on a book that will not exist until December. The quality of that estimate is therefore part of the relationship as much as a technical parameter, and the two ways of being wrong are not equivalent. A cedant that systematically understates pays less on deposit but marks itself to the market through recurring adjustments and loses credibility at renewal; one that overstates ties up its cash for nothing. The variation clause handles the case where the gap grows so wide that price no longer matches exposure: a third more volume is not a detail adjustment, it is a different book from the one priced. It then opens the reinsurer a rate revision, applied to the whole base and not merely to the excess, which is the consequence to remember.
Glossary entry · revenu-prime-estime3. A layer is rated at 4.2 percent of an estimated base of fifty million, with a minimum and deposit premium of 2.1 million. The real base comes in at forty four million, a computed premium of 1.85 million. What happens, and why?
Nothing is returned: the floor pays for capacity tied up all year and unsellable twice
The minimum and deposit premium is the sum a cedant pays at inception of a non proportional treaty whose final premium will depend on a base not yet known. It plays two roles in one payment, and conflating them means missing the question: it is the reinsurer's cash advance, and it sets the amount below which the final premium cannot fall, even if the base turns out smaller than expected. It is that second role, the floor, which decides the case described. The problem solved is an asymmetry in the end of period calculation: without a floor, a cedant whose book contracts would pay a derisory premium for capacity the reinsurer tied up all year and could not sell twice. Committed capacity is committed from the first day to the last, whatever volume turns up, and the floor pays for that commitment. The mechanics are therefore deliberately asymmetric: had the base exceeded the estimate, an additional premium would have fallen due; because it stayed below, nothing comes back. Payment is usually made in quarterly quarters, with final adjustment once the real base is reported.
Glossary entry · prime-minimale-depot4. A cedant reports a base of two hundred and twelve million outside the contractual ninety day deadline. What consequence does the adjustment mechanism attach to that lateness?
The reinsurer may estimate the base ex officio, and its estimate almost always runs in its favour
The adjustment premium is the balance owed by the cedant when the real base of a non proportional treaty, known only after year end, exceeds the estimated base on which the minimum and deposit premium was computed. It is worked out by applying the contractual rate to the observed base and deducting what has already been paid. The problem solved is pricing an exposure unknown when the contract incepts: a treaty covers a book that will grow or shrink over twelve months, and fixing the final premium in advance would overcharge a contracting cedant or undercharge a fast growing one. The adjustment restores proportionality between exposure and premium, and that is its only function. In return it imposes reporting discipline, which is the point of the question: the cedant must produce the base within the contractual deadline, generally ninety days after year end. Failing to report does not suspend the mechanism, it moves the pen: the reinsurer estimates ex officio, and an estimate made by the party about to collect unsurprisingly settles on a high base. The sanction is therefore not a stated penalty but a reversal of who holds the figure, which often costs more.
Glossary entry · prime-ajustement5. A layer of one hundred million limit carries a modelled expected loss of 1.4 million and places at 4.2 million of premium. The next year, after a loss free season and an influx of capacity, it places at 2.8 percent. What is being tracked by reading the two figures together?
The multiple, which says how many times expected loss is paid, and which contracts when capital floods in
Loss on line relates a layer's annual expected loss to its limit, expressing as a percentage what the layer should cost if sold at pure cost. It must not be confused with rate on line, which relates the premium actually paid to the same limit: the first is a modelled quantity, the second a market price, and the gap between them measures the reinsurer's margin. The problem solved is comparison, between layers and between years. Two layers showing the same rate on line may carry very different loss on lines, one dear and one underpriced, and only setting them side by side shows it; a price alone says nothing, since it does not say what is being bought. The ratio of rate on line to loss on line, called the multiple, is the indicator investors in insurance linked securities watch above all, because it answers the question that concerns them: how many times is expected loss being paid. In the example the multiple falls from three to two year on year. The reading that matters is there and it is counterintuitive: a contracting multiple signals a market where capital is flooding in, regardless of the absolute level of prices, while a price falling as much as expected loss falls signals nothing at all.
Glossary entry · loss-on-line6. A quota share pays thirty percent provisional commission on sixty two million of ceded premium. At the first adjustment the scale brings the rate to twenty four percent and the cedant must repay 3.72 million, of which it had reserved only 1.1 million. What does this episode expose?
A debt that materialises when the treaty behaves badly, hence at the worst moment for results
Provisional commission is the rate paid to the cedant during the year, pending enough claims development to fix the final rate of a sliding scale or profit commission. It is usually set near the expected rate, sometimes slightly below to reduce the risk of repayment. Adjustments then fall at agreed dates, often twelve, twenty four and thirty six months after year end, each recomputing the rate on claims known to date and producing either a further payment or a clawback. The problem solved is cash flow, and it is real: a cedant cannot wait three years for the remuneration covering its acquisition costs, already paid out when the policy was written. The point to watch is symmetry, and that is the whole subject of the question. A provisional commission set too high produces clawbacks, and clawbacks never fall at random: they arrive precisely when the treaty is behaving badly, which is to say in a year whose result is already impaired. The debt and the bad news are correlated by construction. A prudent finance function reserves that debt as soon as it becomes probable rather than waiting for it to become certain, because by then it lands all at once on a year with nothing to absorb it.
Glossary entry · commission-provisionnelle7. A quota share provides a sliding scale commission between twenty and thirty five percent, at one point of commission per point of loss ratio. Which parameter decides the share of technical result each party bears?
The slope of the scale: steep, it shifts much of the result to the cedant; gentle, it leaves it with the reinsurer
A sliding scale commission makes the rate paid to the cedant depend on the loss ratio actually observed: the better the treaty behaves, the higher the commission, and conversely. The scale is bounded by a minimum and a maximum, with a balance point around the expected ratio, and settles through successive adjustments as claims develop. The problem solved is alignment of interests on a proportional treaty, and it is best understood by imagining the alternative: a flat commission pays the cedant the same rate whether it underwrites well or badly, so the reinsurer alone bears the drift of underwriting it does not steer. By tying remuneration to result, the sliding scale makes the cedant carry part of the consequence of its own choices, without turning the treaty into pure retention since the bounds limit movement both ways. The parameter that decides everything is the slope, meaning the points of commission lost or gained per point of ratio, and it is the most argued at renewal: a steep slope shifts much technical result to the cedant, a gentle one leaves most of the risk with the reinsurer. The bounds complete the arrangement by capping the effect at either end, so that a very bad year does not fall indefinitely.
Glossary entry · commission-glissante8. A quota share shows a commission rate of twenty eight percent, against twenty one the reinsurer would have required without a corridor. What follows about how a proportional treaty should be read?
Commission and corridor are read together: the corridor buys a presentable rate by transferring risk
A loss corridor is a provision by which the cedant takes back, inside a proportional treaty, the losses falling between two loss ratio levels. Below the corridor the proportional split works normally; inside it, the cedant bears all or part of the burden; above it, the split resumes in full. That last point deserves emphasis because it is often lost: protection against extreme scenarios remains intact, the corridor touching only a middle band. The problem solved is that band precisely, the one where results deteriorate without anything catastrophic happening, and where the reinsurer suspects slack underwriting rather than bad luck. By making that zone expensive for the cedant, the corridor restores the incentive exactly where it was being lost. The practical consequence is the one in the question, and it is a rule of reading: the corridor is a powerful negotiating tool in a hard market because it keeps a presentable commission rate while transferring risk to the cedant. Seven apparent points of commission separate the two structures here, and they measure no real advantage. One therefore never reads a commission without its corridor, nor a corridor without the commission it made it possible to show.
Glossary entry · loss-corridor9. A treaty provides a profit commission of twenty five percent of the profit and a loss participation of twenty percent of losses beyond a seventy five percent ratio, capped. What distinguishes this from a corridor?
It works progressively beyond a threshold, where a corridor neutralises an entire defined band
Loss participation is the mirror of profit commission: where the latter returns to the cedant a share of the treaty's profit, the former makes it take back a share of the loss beyond a loss ratio threshold. It is expressed as a percentage of losses above the threshold, often between ten and thirty percent, and is capped so as not to cancel the point of the treaty, failing which the cedant would take back through one channel what it ceded through the other. The problem solved is moral hazard on lines where the reinsurer does not see files one by one: it accepts remaining exposed to large losses but refuses to bear alone the effect of underwriting policy it does not control. The difference from a corridor is one of shape and shows clearly when the two are superimposed: a corridor neutralises an entire defined band, so the cedant bears everything inside it and nothing particular above; participation acts progressively beyond a threshold, with no upper bound on the ratio, which makes it more readable for both parties. It is very often paired with a profit commission in the same wording, the two forming a symmetric split practitioners call a bilateral participation treaty.
Glossary entry · loss-participation10. A reinsurer finds a cedant's accounts arrive on average one hundred and forty seven days after quarter end, against sixty two for its portfolio median, and charges 0.9 point of premium at renewal. What is it charging for?
The cost of uncertainty in its own reserving, which it must estimate for want of current data
The treaty account is the statement a cedant sends the reinsurer at agreed intervals, usually quarterly, setting out ceded premium, commission, paid losses, movements in provisions and the net balance due one way or the other. It is the accounting instrument of the relationship and, on a proportional treaty, the only view the reinsurer has of its business: it does not see the policies, it does not see the files, it sees this account. The problem solved is therefore the circulation of information in a relationship where one party holds all the data. Without a standardised periodic statement, the reinsurer could neither reserve, nor close, nor steer its retrocession. The consequence of lateness is what the question asks to be named, and it is financial before it is administrative: a reinsurer without current accounts must estimate, and an estimate carries an uncertainty margin that costs capital tied up. That cost is quantifiable and gets charged, not as a penalty but as an element of price. The quality and punctuality of accounts are for this reason a criterion for selecting cedants as much as their claims experience, and the relationship works both ways since a delay brought back to normal brings the loading down again.
Glossary entry · compte-de-traite