What is reinsurance
insurance of insurance
Insurance purchased by reinsurers for themselves
Why do insurers buy reinsurance
Risk transfer
Peace of mind
Balancing out peaks and troughs
releasing capacity
Why do firms sell reinsurance
Accessing business not otherwise available - E.g. a regulator may only agree to a licence only for reinsurance business
Becoming involved in a class of business on a trial basis - Safer way to try out a new class of business is to write some reinsurance for another insurer that already writes the business
Pure business preference - Some organisations almost totally consists of reinsurance and they actively prefer that type of business
What is retention / retained line
The amount of the original risk the insurer is retaining
What does “Full Follow Clause” mean
The insurer makes all the claims decisions, and does not even need to tell the reinsurer that a claim is in progress
What does “Claims Co-operation Clause” mean
The insurer has to advise the reinsurer of the loss and keep them advised during their handling of the claim - the reinsurer does not necessarily have any rights to interfere with the insurers claims handling strategy and decision making
What does “Claims Control Clause” mean
This allows the reinsurer to have full decision-making control.
To cede
The act of sharing the risk with reinsurers
Cedant
Original insurer who is passing the risk to reinsurers
Cession
The share of the risk passed to reinsurers
Collecting note
The document used to present the claim to reinsurers for excess of loss reinsurance
Facultative Reinsurance
Reinsurance purchased for an individual risk, generally because it would not fit within any other part of the reinsurance already available. Will only respond to claims arising out of that one risk.
The other types of reinsurances work more on a ‘grouped’ basis, whereby they protect whole sections of the insurer’s book or portfolio of business, such as the hull account or the property account.
Non-proportional Reinsurance
Claims will be paid out in excess of a pre-agreed amount.
Excess of loss and stop loss are examples of non-prop.
The reinsurer only pays when the insurer’s losses exceed a certain amount
Retention - The amount the insurer must pay before the reinsurers coverage begins.
Proportional Reinsurance
Premium and claims are shared between insurer and reinsurer in pre-agreed proportions.
Quota share and Surplus treaty reinsurance are examples of proportional re.
Quota Share Reinsurance
The reinsurer has a fixed percentage of all risks shared.
Example: 40% quota share → reinsurer gets 40% of premiums and pays 40% of losses.
Proportional Treaty
Surplus Reinsurance
The Reinsurer only shared the part of a risk that exceeds the insurers retention limit (The amount of the original risk the insurer is retaining)
Example: If the insurer’s retention is $1 million and a policy covers $4 million, the reinsurer covers $3 million (75%), so it shares 75% of the premium and losses for that policy
Reinstatement
Where a layer of the reinsurance can be “reinstated” usually by the payment of an extra premium. (Reinstatement premium)
If a layer becomes exhausted due to a loss, reinstatement allows the insurer to restore that protection
Retrocedant
A reinsurer who obtains reinsurance for itself
Retrocession
The transaction whereby a reinsurer cedes part of a risk to another reinsurer
Retrocessionaire
A reinsurer providing reinsurance to a reinsurer
Treaty reinsurance
Reinsurance that can be purchased to cover a wider portfolio of risks, either a class of business or even an insurers whole book of business.
Facultative Obligatory Reinsurance
The insurer makes an agreement with a reinsurer (or group of
reinsurers) that for all risks that it writes which fall within a certain pre-agreed set of criteria, the original insurer has the choice to cede that individual risk to the reinsurer(s).
In practice, this means each time a risk is written by the insurer it can consider whether it wants to take up the reinsurance available. It is optional for the insurer.
However, if it decides to cede the risk, the reinsurer has to accept it – that is the ‘obligatory’ element in the title.
Deposit premium
The down payment payable which can be adjusted sometime later
May have to be partially refunded depending on how the adjustment works out
Calculating Reinstatement Premiums
Maximum total amount that an insurance company will pay for all covered claims during a specified policy period (usually one year).
