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Reinsurance
"Reinsurance is the transfer of part of the hazards or risks that a direct insurer assumes by way of insurance contracts on behalf of an insured, to a second insurance carrier, the reinsurer, who has no direct contractual relationship with the insured."
Reinsurance can be classified in the following ways:
Proportional or Non-proportional - depending on the way the risks, the premium and the losses are shared between the insurer who is sharing his business and the reinsurer who is accepting it.
Treaty or Facultative - depending on how the contract is administered, either on an individual basis with offer and acceptance for each individual risk or on some kind of automatic agreements for various risks over a stipulated period of time.
Inward or Outward - depending on whether reinsurance is being accepted or given out.
Treaty or Facultative - depending on how the contract is administered, either on an individual basis with offer and acceptance for each individual risk or on some kind of automatic agreements for various risks over a stipulated period of time.
Inward or Outward - depending on whether reinsurance is being accepted or given out.
This is Reinsurance effected on a case to case basis. When a risk is too large for the insurer to retain, he offers to share the risk with other reinsurers. Neither the ceding company nor the reinsurer is under any obligation to cede or to accept any risk. In case of proportional facultative reinsurance, the interested reinsurers who agree to take shares of the risk are then paid the corresponding share of the premium less the reinsurance commission. In case of losses, they agree to share the same in proportion to the share of premium given to them. In case of non-proportional facultative reinsurance, the reinsurers agree to pay for losses once they exceed an agreed deductible. In such a case, the premium is not shared on a proportional basis but on some other agreed basis depending on the risk. Originally, all reinsurances were done facultatively but soon this was found to involve too much of administrative costs and was later supplemented by automatic agreements called treaties. Today, facultative reinsurance is usually resorted to reinsure risks for which automatic treaties either do not exist or are not adequate. It therefore allows for increased capacity as and when required. It is also used for reinsurance of specialized types of risks which are handled by certain reinsurers only.
This is a standing arrangement where the ceding insurer has an obligation to cede all risks that fall within the purview of the arrangement and the reinsurer is under an obligation to accept all that is ceded. Thus, Treaty reinsurance consists of an agreement between the original insurer and reinsurer whereby the reinsurer automatically accepts a certain liability for all risks falling within the scope of the agreement. Treaty reinsurance may be transacted either on proportional basis or non-proportional basis.
A formal treaty wording is usually drawn up by the parties to describe:
1. the monetary limits and mode of operation
2. the classes of business covered, the territorial scope, the risks excluded
3. the calculation and payment of premiums, the calculation and payment of claims and the period of agreement
4. the commissions, including profit commissions, payable to the insurer
5. the rendering of reinsurance accounts to the reinsurer and settlements thereof
Since treaty reinsurance provides automatic cover, usually for a year, the insurer is guaranteed a definite amount of reinsurance protection on every risk which he accepts. The administrative costs are therefore much lower than those applying to facultative reinsurance.
A formal treaty wording is usually drawn up by the parties to describe:
1. the monetary limits and mode of operation
2. the classes of business covered, the territorial scope, the risks excluded
3. the calculation and payment of premiums, the calculation and payment of claims and the period of agreement
4. the commissions, including profit commissions, payable to the insurer
5. the rendering of reinsurance accounts to the reinsurer and settlements thereof
Since treaty reinsurance provides automatic cover, usually for a year, the insurer is guaranteed a definite amount of reinsurance protection on every risk which he accepts. The administrative costs are therefore much lower than those applying to facultative reinsurance.
In this type of reinsurance, the insurer and reinsurer share the risk, the premium as well as the losses in an agreed proportion. The premium and claims are divided in the same proportion as the risk is. Thus if the reinsurer shares 60% of the risk, he is paid 60% of the original premium and he also shares 60% of all losses pertaining to the risk. However, the insurer who shares this business is compensated for his acquisition costs by way of an agreed commission which is his income.
Quota share treaties, the obligatory cessions, surplus treaties, the market surplus treaty, the pool arrangements, the intercompany cessions and the Auto fac arrangements all fall within this definition
Under this type of reinsurance arrangements, the risks, premiums and losses are not shared on a proportional basis. Rather, this type of reinsurance seeks to protect the losses of the insurer by the reinsurer on an agreed basis. In other words, the reinsurer agrees to pay losses sustained by the insurer above an agreed amount or percentage called a deductible. Such losses may be in relation to a particular risk or many risks in a particular class of risk or even all risks of the insurer by the reinsurer. Of course, such reinsurance comes at a cost for which the reinsurer is paid a reinsurance premium on some agreed basis. Risk Excess of Loss, Catastrophe Excess of Loss, Stop Loss, Aggregate Excess of Loss, Umbrella Excess of Loss etc. fall within this type of reinsurance.
This is an arrangement where the ceding insurer (reinsured) can choose which risks he wants to cede to the arrangement but the reinsurer has no option to choose – he agrees to accept all that is ceded.
This form of reinsurance is therefore a combination of facultative and treaty forms. At present this type of treaty is not common though one would come across such arrangement in life reassurance. It can be placed during weak reinsurance market conditions or for getting additional capacity but cannot be relied upon as a primary reinsurance.
This form of reinsurance is therefore a combination of facultative and treaty forms. At present this type of treaty is not common though one would come across such arrangement in life reassurance. It can be placed during weak reinsurance market conditions or for getting additional capacity but cannot be relied upon as a primary reinsurance.
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