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Frequently Asked Questions(click to expand)
What Is Reinsurance?
Reinsurance is a transaction where one party indemnifies another against some or all of the liabilities it is contracted to under an insurance policy. The ‘Reinsurer’ is the insurance company/companies providing the indemnity.
The ‘Reinsured’ (also known as the original insurer, primary insurer, cedant, cedent or ceding company) is the insurance company buying insurance from the Reinsurer.
An insurance company may purchase reinsurance as a form of risk management as an alternative to capital or to reduce the instability of their results. In short, Reinsurance is insurance for insurance companies to reduce any losses sustained by allowing them to recover all, or part, of the amounts they pay to claimants.
What Are The Different Types Of Reinsurance?
- Facultative Coverage: an insurance policy for a provider covering an individual, specified risk or contract
- Reinsurance Treaty: an insurance policy covering a specific time period (rather than a specific risk)
- Proportional Reinsurance: an insurance policy where one or more reinsurers take a shared percentage of the premiums of each written policy and pay the stated percentage of any subsequent claims
- Non-Proportional Reinsurance: an insurance policy where the reinsurer pays a claim if the insurer’s losses exceed its retained limit
- Excess Of Loss Reinsurance: a type of Non-Proportional Reinsurance involving a claim due to a catastrophic event
- Risk-Attaching Reinsurance: an insurance policy covering all types of claim within a certain period, regardless of whether the losses occurred outside the coverage period
- Loss-Occurring Coverage: an insurance policy where an insurance company can claim all losses that occur during the reinsurance contract period
Who Is Reinsurance For?
Reinsurance is for insurance companies who wish to insure the risks they have placed for clients. Unlike co-insurance where several insurance companies come together to issue one single risk, reinsurers are typically the insurers of the last resort. The insurance business is based on laws of probability which presupposes that only a fraction of the policies issued would result in claims. Therefore multiple insurance companies will share the risk by purchasing insurance policies from other insurers to limit the total amount the original insurer would have to bear in the case of a catastrophic loss.
Most insurance companies have a Reinsurance program in order to reduce their exposure of experiencing a huge loss.
What Does Reinsurance Cover?
Reinsurance covers several aspects of a shared insurance program:
- Risk transfer: sharing or transferring risks with other insurance companies
- Arbitrage: purchasing insurance at a lower premium than regular policyholders
- Capital management: passing risk by avoiding large losses
- Solvency margins: purchasing surplus relief to allow companies to accept new clients without requiring additional capital
- Expertise: sharing knowledge with other insurance companies to obtain a proper rating and premium
What Is Not Included In Reinsurance?
While Reinsurance is designed to share the risk of a catastrophic loss amongst several insurers, some policy wordings may exclude damage caused by the following:
- Nuclear materials
- Radioactive materials
While there are some specialty programs that include the above (albeit within certain limits or as an Excess), ensure that if particular risks are required then they are not mentioned in the exclusions.
How Much Does Reinsurance Cost?
In order to price how insurance will be calculated and shared a rated reinsurer will need to create a diversified portfolio to minimise the probability that it will be unable to meet all of its obligations. Rating agencies will review a reinsurer’s business model to determine how confident they can be that the reinsurer will be able to honour all its claims. Key parameters will include the amount of capital that the reinsurer holds and the likely volatility of losses.
Other stakeholders in a reinsurer, such as regulators and boards of directors, will use different calculations to assess how much capital a rated reinsurer must hold. Any calculation will be based on ensuring that the reinsurance company can survive an extreme stress test. But a reinsurer’s theoretical liabilities are usually much greater than its capital base so an extreme, if improbable, set of events could cause the reinsurer to be unable to pay claims in full.