…The current application is a reduction of 20% on the premium parameter for three lines of business (motor liability, fire and general liability). Its main benefit obviously is simplicity, but this also causes downsides.
Firstly, 20% is an average percentage for the entire industry which means that in practice all insurance undertakings have a different effect than 20%. Secondly, it is limited to only three lines of business. These are widespread industries in Europe, but also within e.g. the Marine business line, non-proportional reinsurance is quite common. Thirdly, the factor only applies to the standard deviation for the premium risk component (and thus not to the reserve component). This means that reinsurance through structures like an Adverse Development Cover (ADC) does not qualify for any capital reductions. Fourthly, specific combinations of reinsurance covers, such as an Aggregate XL (on top of a regular non-proportional cover) or specifics of the underlying cover such as an annual aggregate deductible are not captured in this methodology.
