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RE-INSURANCE
AND

CO-INSURANCE
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Re-Insurance
/ ri: ɪnˈʃʊər(ə)ns/

Reinsurance is a transaction whereby one insurance company agrees to indemnify

another insurance company against all or part of the loss that the latter sustains under
a policy or policies that it has issued

It is a means by which an insurance company can protect itself from risks.

The company who requests for the cover is called the cedent and the reinsurer is
called the ceded.
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Why Reinsurance?
Risk Transfer
Greater individual risks than its size
Offer higher limits of protection to a policyholder

Income Smoothing

Absorbing larger losses

Surplus relief
Solvency Margin

Arbitrage
Price differential between two or more markets

Reinsurer’s Expertise

Manageable and Profitable Portfolio

Managing Cost of Capital

Capital In terms of Reinsurance
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Elements of Reinsurance
Reinsurance is a form of insurance.

There are only two parties to the reinsurance contract - the Reinsurer and the
Reinsured - both of whom are insurers, i.e. entities empowered to insure.

A reinsurance contract is an indemnity contract.

Reinsurance contracts are not subsequent contracts or contract in addition to

original contract , rather it is a complete separate contract.

There must be transfer of risk from one party to another in case of insurance
companies. Therefore it is mandatory to reinsure the insurance contract.
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Functions of Reinsurance

1. Financing
2. Stabilization
3. Capacity
4. Catastrophe Protection
5. Services
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Methods Of Re-Insurance
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Reinsuranc
e

Facultative Treaty

Excess of Excess of
Pro Rata Pro Rata
Loss Loss

Quota Surplus Per Aggregate

Per Risk
Share Share Occurrence Loss
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Facultative Re - Insurance
- Individual Risk Review
- Right to accept or reject each risk on its own merit

A D VA N TA G E S D I S A D VA N TA G E S
 Flexible – T&C vary  Uncertainty regarding
 Important where no other acceptability
method works  Delay
 Increase insurer’s  Adverse Conditions
capacity
 Stability – transfer of
losses
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P R O R ATA EXCESS OF LOSS

 Proportionate method  Comes into action beyond

 Fixed Percentage the retention capacity
 Insurance Value, Loss,  Non proportionate method
Premium distributed
accordingly
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Treaty Re - Insurance
- Applies to company’s entire book of business
- Some of these include all commercial fire polices, all automobile policies, all workers’
compensation policies, all homeowners policies, or, more generally, any combination of the
above
- Treaty reinsurance is the one in which both pro-rata and excess of loss forms are used.

A D VA N TA G E S D I S A D VA N TA G E S
 It is automatic as no  Limited knowledge about
uncertainty is involved each contract
 No uncertainty, no delay  The reinsurer might face
in writing contract losses.
agreement  Unprofitable in the long
 It is economical term period.
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Quota Share Treaty

- Parties agree to share premiums and losses

based on some proportions.
- Retention limit is stated as a percentage
- This is done in a pre – determined ratio
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Surplus Share Treaty

- Also called surplus line treaty

- Reinsured some amount in excess of specified
net retention
- Retention limit is stated in money value
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Excess Of Loss Treaty

- Distribution of liability on the basis of losses

- No insurance amount is ceded
- Three types –
- Per Risk
- Per Occurrence
- Aggregate Excess
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Hybrid Reinsurance

It is a type of reinsurance which is formulated to transfer

only part of the risk of loss to an insurer while the
organisation retains the balance of exposure.
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Co - Insurance

- Contractual Provision

- Provide insurance against high risk difficult to cover by single insurer

- Generally found in property insurance

𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝐶𝑜𝑣𝑒𝑟𝑒𝑑

Amount of Recovery = X Actual Loss
𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 I𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑
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Methods of Co - Insurance
- Fixed Proportion – Each insurer has a separate policy for the proportion
of interest insured. The premium and loss are shared in the defined
proportion.

- Collective Policy – Leading office plays important role. Leading office is

the office among co – insurers who agrees to perform as leader and on
behalf of co - insurer it takes decision and communicate with insured
subject to rules framed by among themselves.

- Mutual Agreement – Leading office issues the policy and signs on the
behalf of participating insurers. The leading office makes arrangement of
collection of premium and calculation of loss distribution as pre –
determined respective share of co – insurers