Reinsurance

Reinsurance

1. Definition

   • Reinsurance is a financial transaction by which risk is transferred (ceded) from an insurance company (cedant) to a reinsurance company (reinsurer) in exchange of a payment (reinsurance premium).
     • The terms of a reinsurance transaction are defined in a reinsurance treaty
     • Reinsurers can also transfer risks to other entities called retrocessionaires by means of a financial transaction similar to reinsurance called retrocession.
       • Professional retrocessionaires are expected to keep and not to transfer the assumed risk to other entities.

2. Reinsurance needs

   • Increasing underwriting capacity
   • Risk capital improvement and diversification
   • Surplus relief
   • Catastrophic protection
   • Expertise transfer
   • Financing new business

3. Types of reinsurance agreements

   • Automatic treaty
     • All risks that are defined to be object of the agreement are ceded automatically to the reinsurer, and the reinsurer agrees to accept all those risks.
     • This characteristic of treaty reinsurance to offer “blind acceptance” of the risks to the cedant requires that the reinsurer know and trust the cedant.
     • Treaty reinsurance is therefore only offered after the reinsurer has done proper due diligence on the insurance company to determine the quality of the business that would expect to reinsure.
       • the expertise of the company
       • its risk attitude
       • its track record
       • the expected amount of business to be reinsured
       • other technical aspects
     • On a regular basis the reinsurer will audit the cedant to ensure that the terms of the treaty are followed
       • The underwriting guidelines are respected
       • The types of accepted risk comply with the object of the treaty
       • All risks that needed to be ceded have been ceded
       • Proper accounting and administration was done
   • Facultative reinsurance
     • Here the reinsurer participates in the underwriting and assessment of the risk.
     • Depending on the risk the reinsurer might or might not accept the reinsurance.
       • In case of acceptance the reinsurer will provide the particular terms, like premium, exclusions, and so forth.
     • On a facultative treaty the cedant decides if a risk will be offered to the reinsurer and the reinsurer will decide on an individual basis if it will accept or not the offered risk.

4. Forms of reinsurance

   • Proportional reinsurance
     • There is a proportional sharing of premium, claims, expenses, and so forth.
     • It creates a type of partnership between the cedant and the reinsurer as they have a strong alignment of interests in the performance of the underlying business.
   • Non-proportional reinsurance
     • The interests are usually not aligned and can even be opposed with respect to the performance of the business
     • Excess of Loss reinsurance (XL)
     • Stop loss reinsurance
     • Catastrophic excess of loss reinsurance