The different types of reinsurance: definition (2024)

FAQs

What are the different types of reinsurance? ›

In simple terms, reinsurance could be defined as insurance for insurance companies. There are several types of insurance. They include proportional reinsurance, non-proportional reinsurance, excess-of-loss reinsurance, facultative reinsurance, and treaty reinsurance.

Reinsurance is a type of insurance that is purchased by insurance companies to reduce risk. Essentially, reinsurance may restrict the cost of damages that the insurer can theoretically experience. In other words, it saves insurance providers from financial distress, thus shielding their clients from undisclosed risks.

Several common reasons for reinsurance include: 1) expanding the insurance company's capacity; 2) stabilizing underwriting results; 3) financing; 4) providing catastrophe protection; 5) withdrawing from a line or class of business; 6) spreading risk; and 7) acquiring expertise.

Reinsurance can be divided into two basic categories: treaty and facultative. Treaties are agreements that cover broad groups of policies such as all of a primary insurer's auto business.

Facultative reinsurance is one of two types of reinsurance (the other type of reinsurance is called treaty reinsurance). Facultative reinsurance is considered to be more of a one-time transactional deal, while treaty reinsurance is typically part of a long-term arrangement of coverage between two parties.

Reinsurance is basically insurance for insurers. It transfers some of the liability to the reinsurer thus lowering the risk for the primary insurer and freeing up capital that can use to issue new policies. In this way, reinsurance brokers can lower the risk of financial loss in case of a major natural disaster.

From an investment perspective, reinsurance serves primarily as an income-producing asset. Investors pool money in a reinsurance fund that, in turn, provides coverage to back the risk carried by other insurers. Those insurers pay premiums for the coverage, generating an income stream for investors.

Reinsurance is... an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance. (reinsurance) the ceding company is. the primary insurer.

Facultative Reinsurance

This is the oldest form of reinsurance. Facultative reinsurance is a method of reinsurance where an insurance underwrite offers a risk to one or more reinsurance underwriters on an individual basis.

The two types of treaty reinsurance contracts are proportional and non-proportional contracts. Treaty reinsurance is one type of reinsurance, the others being facultative reinsurance and excess of loss reinsurance. Treaty reinsurance is less transactional and less likely to involve risks that can be rejected.

What is the principle of reinsurance? ›

Reinsurance Principles

Reinsurance could be defined as “the insurance of insurers”. In reality, it is a contract by which a specialized company (the reinsurer) assumes part of the risks underwritten by an insurer (the ceding company) from its insured.

Insurance is a legal agreement between an insurer and an insured in which the former guarantees to defend the latter in the event of damage or death. Reinsurance is the insurance a firm purchase to lessen severe losses when it decides not to absorb the entire loss risk and instead shares it with another insurer.

Excess of loss reinsurance can have three forms - "Per Risk XL" (Working XL), "Per Occurrence or Per Event XL" (Catastrophe or Cat XL), and "Aggregate XL". In per risk, the cedent's insurance policy limits are greater than the reinsurance retention.

While they are both forms of reinsurance, facultative considers each policy individually and generally indicates a shorter term relationship. Treaty, on the other hand, considers multiple policies of a specific class of insurance issued by an insurance company and indicates the companies will work together longer term.

For example, let's assume a major concert venue purchases a commercial umbrella liability insurance policy with a coverage limit of $10 million. The insurance company writing the policy may contact a reinsurer to cover a portion of its financial responsibility.

While Proportional reinsurance is based on the sum insured, Non Proportional reinsurance uses the size of the claim to design the cover. The insurance company decides the claim amount it can assume for itself on one single risk or on one event involving many risks: that is the retention.

Excess insurance covers specific amounts beyond the limits in the primary policy. Reinsurance is when insurers pass a portion of their policies onto other insurers to reduce the financial cost in the event a claim is paid out.