REINSURANCE

DEFINITION
Reinsurance is insurance that is purchased by an
insurance company (the "ceding company" or "cedant"
or "cedent" under the arrangement) from one or more
other insurance companies (the "reinsurer") directly or
through a broker as a means of risk management,
sometimes in practice including tax mitigation and other
reasons.
PARTIES IN REINSURANCE
Ceding Insurer/Cedant - the co., which is purchasing the
reinsurance (reinsured).
Assumed Insurer - the co., which is selling the
reinsurance to another co.,
In Reinsurance one insurance company purchase an
insurance policy from another insurance company. This is
basically insurance for insurance companies. Sometimes,
this type of coverage is also referred to as stop-loss
insurance. One insurance company will basically buying a
portion of the risks from another insurance company. The
company that takes over the risks will also receive some
of the compensation from the insurance policies.
Also termed as…… Reinsurance is also known as
•Insurance of insurance co.,
•Stop-loss insurance
REINSURANCE
MEANING
Reinsurance is insurance that is purchased by an insurance
company directly or through a broker as a means of risk
management, sometimes in practice including tax mitigation
and other reasons described below. The ceding company and
the reinsurer enter into a reinsurance agreement which details
the conditions upon which the reinsurer would pay a share of
the claims incurred by the ceding company. The reinsurer is
paid a "reinsurance premium" by the ceding company, which
issues insurance policies to its own policyholders.
OBJECTIVES
 To limit liability on specific risks
 To stabilize loss experience
 To protect against catastrophes
 To increase capacity
 WHY REINSURANCE
Risk Transfer
Greater individual risks than its size
Offer higher limits of protection to a policyholder
 Income Smoothing Absorbing larger losses
Surplus relief Solvency Margin
 Arbitrage
Price differential between two or more markets
 Reinsurer's Expertise
Manageable and Profitable Portfolio
 Managing Cost of Capital
Capital In terms of Reinsurance
FUNCTIONS OF REINSURANCE
• Financing
• Stabilization
• Capacity Catastrophe Protection
• Services
STABILIZATION

 Marketing Consideration

Policyholders and stockholders like to be identified with a

stable and well managed company.
 Management Consideration

Planning for long term growth and development requires a

more stable environment than an insurance company's book of
business is apt to provide
CAPACITY

 Refers to an insurer's ability to provide a high limit of

insurance for a single risk, often a requirement in
today's market.
 Reinsurance can help limit an insurer's loss from one
risk to a level with which management and
shareholders are comfortable.
CATASTROPHE PROTECTION
 Objective is to limit adverse effects on P&L and surplus
from a catastrophic event to a predetermined amount.
 Covers multiple smaller losses from numerous policies
issued by one primary insurer arising from one event
SERVICES
 Claims
 Product Development
 Actuarial Review
 Financial Advice
Types of Reinsurance
Treaty versus facultative
 Treaty: reinsures a group of the insurer’s policies
 Facultative: reinsures a specific risk written by the
insurer
Proportional versus excess (non-proportional)
 Proportional (pro rata): losses and premiums split
between insurer and reinsurer on a percentage basis
 Excess-of-loss: reinsures losses above a certain
amount
 Forms of pro rata reinsurance
• Quota share: reinsurer pays a fixed percentage
of each policy’s losses, and receives a fixed
percentage of the original premium
• Surplus share: reinsurer’s share varies by policy
(according to policy limit)
 Forms of excess-of-loss reinsurance
• Per risk: covers individual losses from each policy
or risk (common for property coverages)
• Per occurrence cover: covers losses from each
event or occurrence, across all policies (common
for casualty coverages)
Working layer
Clash covers
• Per occurrence / catastrophe cover: covers a
single large event (e.g., natural catastrophe)
• Stop-loss / aggregate excess: protects net results
IMPORTANCE FOR INSURERS