What are the two types of reinsurance in life insurance?
Facultative reinsurance and reinsurance treaties are two types of reinsurance contracts. When it comes to facultative reinsurance, the main insurer covers one risk or a series of risks held in its own books. Treaty reinsurance, on the other hand, is insurance purchased by an insurer from another company.
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.
Reinsurance, or insurance for insurers, transfers risk to another company to reduce the likelihood of large payouts for a claim. Reinsurance allows insurers to remain solvent by recovering all or part of a payout. Companies that seek reinsurance are called ceding companies.
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.
Reinsurance ceded is the action taken by an insurer to pass off a portion of its obligation for coverage to another insurance company. Reinsurance assumed is the acceptance of that obligation by another insurance company.
Facultative reinsurance is designed to cover single risks or defined packages of risks. Treaty reinsurance, on the other hand, covers a ceding company's entire book of business – for example an insurer's homeowners' insurance book.
Example of Facultative Reinsurance
Suppose a standard insurance provider issues a policy on major commercial real estate, such as a large corporate office building. The policy is written for $35 million, meaning the original insurer faces a potential $35 million in liability if the building is badly damaged.
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.
In other words, insurance providers buy reinsurance to protect themselves against losses arising from their customers. It basically transfers some portion of the risk of the insurance company to another insurance company or a group of insurance providers to mitigate the losses smoothly.
Life reinsurers offer financial flexibility and can provide significant capital relief to life insurers. In addition, life reinsurance can enable life insurers to reduce portfolio expenses while improving their return on capital. These advantages have led to steady growth in offshore long-term reinsurance assets.
What are the main 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.
With reinsurance, the company passes on ("cedes") some part of its own insurance liabilities to the other insurance company. The company that purchases the reinsurance policy is referred to as the "ceding company" or "cedent".
A ceding company is an insurance company that passes a portion or all of the risk associated with an insurance policy to another insurer. Ceding is helpful to insurance companies since the ceding company that passes the risk can hedge against undesired exposure to losses.
Fronting has been defined as the use of a licensed, admitted insurer to issue an insurance policy on behalf of a self-insured organization or captive insurer without the intention of transferring any risk. The risk of loss is retained by the self-insured or captive insurer through an indemnity or reinsurance agreement.
Reinsurance is a transaction between two or more insurance companies to apportion risk so that a large loss does not fall on any one company. The insurer transferring part of the risk to another insurer is called the ceding or domestic insurer. The insurer accepting the risk is called the assuming insurer or reinsurer.
Facultative reinsurance is usually the simplest way for an insurer to obtain reinsurance protection. These policies are also the easiest to tailor to specific circ*mstances. Facultative reinsurance is reinsurance purchased by an insurer for a single risk or a defined package of risks.
Three reinsurance methods are usual: Treaty Reinsurance, Facultative Reinsurance and a hybrid mode with elements from the Treaty and the Facultative. This is the most common cession method within the reinsurance market.
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.
Arbitrage: Additional profits can be garnered by purchasing insurance elsewhere for less than the premium the company collects from policyholders. Capital Management: Companies can avoid having to absorb large losses by passing risk; this frees up additional capital.
What is the most important factor in underwriting?
An insured's history of losses, in combination with modeling and group data, should be the primary factors in any analysis of risk from an underwriting perspective.
An example will be if an insurance company insures commercial property risks with policy limits up to $5 million. Then, they purchase per risk reinsurance of $3 million in excess of $2 million. Assuming a loss of $4 million occurs, $2 million is recovered from the insurance company.
Reinsurers play a major role for insurance companies as they allow the latter to help transfer risk, reduce capital requirements, and lower claimant payouts. Reinsurers generate revenue by identifying and accepting policies that they believe are less risky and reinvesting the insurance premiums they receive.
According to a recent report by Howden, the increase in global property-catastrophe prices can largely be attributed to insurers' exposures growing, fueling demand for reinsurance. This demand is supported by stable pricing, encouraging cedants to purchase more coverage for tail risks.
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.
