REINSURANCE

Introduction:

Reinsurance is a device whereby insurance company may

reduce its risk by transferring a portion to one or more insurance companies.
It is a special, highly technical, competitive industry whose existence makes
possible a more effective institution of risk.

“Reinsurance can be described as the “insurance of insurance

companies”.

Reinsurance can be acquired either directly from a reinsurer or through a

broker or reinsurance intermediary.
 Reinsurance is basically a form of coverage intended for

insurance providers. Generally speaking, this type of policy reduces the losses

sustained by insurance companies by allowing them to recover all, or part, of the

amounts they pay to claimants. Reinsurers help insurance providers avoid

financial ruin in case a huge number of policyholders turn out to make their

claims during catastrophic events.

Definition:

Reinsurance is a transaction in which one insurer agrees, for a premium,

to indemnify another insurer against all or part of the loss that insurer may

sustain under its policy or policies of insurance.

1. The company purchasing reinsurance is known as ‘ceding company’ or

‘Cedant’;

• The company selling reinsurance is known as ‘assuming insurer’ or

‘reinsurer’;
Objectives of Reinsurance:
Insurers purchase reinsurance for essentially four reasons:
1. To limit liability on specific risks
2. To stabilise loss experience
3. To protect against catastrophes
4. To increase capacity

Different types of reinsurance contracts are available in the

market commensurate with the ceding company’s goal.
Role of reinsurers:

• Reinsurance is governed with the same principle of insurance.

• But instead of covering property or causality risks directly, the reinsurer

insures insurance companies.

Insurance Company:

• The insurance company is the direct or primary insurer of an individual or a

business.

• The policy is written in its name, making it liable for all claims arising
under policy.

• The insured deals exclusively with the insurance company.

• In an event of claim the insurance company must pay to the insured the full
amount of compensation due under the policy.
Reinsurance Company:

• The insurance company spreads its risks arising under the policy by
transferring all or part of those risks to one or more reinsurance companies.

• In an event of claim the insurance company must pay to the insured the full
amount of compensation due under the policy.

• It is then up to the insurance company to recoup the sums corresponding to

the risk transferred from its reinsurers.

• At the beginning of each year, the insurance company takes out contracts
with one or more reinsurance companies to cover it for policies issued to its
customers .
Essential services rendered by Reinsurer:
1. Reinsurance enables direct writing companies to even out their results when
major, exceptional, losses occur: a hurricane or an earthquake for instance can
seriously affect the accounts of an insurance company. Reinsurances considerably
reduces this type of potential imbalance.

2. Insurance companies use reinsurance to increase maximum amount they are able
to cover as primary insurer for any given potential loss or loss category; in other
words, their available capacity is increased. As a result, insurance companies can
write more risks, or larger risks, without becoming over-extended.

3. Reinsurance also provides insurers with the large amounts of cash needed in the
event of a major loss, enabling them to manage their assets safely and
profitability.
Types of Reinsurance:
The major types of reinsurance policies:
1. Facultative Coverage:
This type of policy protects an insurance provider only for an
individual, or a specified risk, or contract. If there are several risks or
contracts that needed to be reinsured, each one must be negotiated
separately. The reinsurer has all the right to accept or deny a facultative
reinsurance proposal.

2. Reinsurance Treaty :
Unlike a facultative policy, a treaty type of coverage is in effect for a
specified period of time, rather than on a per risk, or contract basis. For
the duration of the contract, the reinsurer agrees to cover all or a portion
of the risks that may be incurred by the insurance company being
covered.
3. Proportional Reinsurance
Under this type of coverage, the reinsurer will receive a prorated
share of the premiums of all the policies sold by the insurance company being
covered. Consequently, when claims are made, the reinsurer will also bear a portion
of the losses. The proportion of the premiums and losses that will be shared by the
reinsurer will be based on an agreed percentage. In a proportional coverage, the
reinsurance company will also reimburse the insurance company for all processing,
business acquisition and writing costs. Also known as ceding commission, such
costs may be paid to the insurance company upfront.
4. Non-proportional Reinsurance:
In a non-proportional type of coverage, the reinsurer will only
get involved if the insurance company’s losses exceed a specified amount,
which is referred to as priority or retention limit. Hence, the reinsurer does
not have a proportional share in the premiums and losses of the insurance
provider. The priority or retention limit may be based on a single type of risk
or an entire business category.

5. Excess-of-Loss Reinsurance:
This is actually a form of non-proportional coverage. The
reinsurer will only cover the losses that exceed the insurance company’s
retained limit. However, what makes this type of contract unique is that it is
typically applied to catastrophic events. It can cover the insurance company
either on a per occurrence basis or for all the cumulative losses within a
specified period.
6. Loss-occurring Coverage:
This is a type of treaty coverage where the insurance company
can claim all losses that occur during the reinsurance contract period. The
important factor to consider is when the losses have occurred and not when
the claims have been made.