The concept of reinsurance is the logical extension of the concept of insurance . Reinsurance serves to underwrite the risk liability of an insurer more or less in the same way as insurance to indemnify the insured with respect to his interest. the basic underlying principle is one of spreading the risk as far and wide as possible.
• Insurance for Insurance Companies
An insurance company, called the primary or ceding company, shares portions of its liability with another insurance company, known as a reinsurer
• Reinsurance is a transaction between insurance companies only
1)The underlying policyholder has no interest or privity in the reinsurance contract
2) The subject matter of a reinsurance contract is the risk the Reinsured undertook in its original policies.
3)The reinsurer “reimburses” the insurer for its portion of paid claims
• The heart of reinsurance is utmost good faith (uberrimae fides)
How Reinsurance Works
It spreads the risk of loss incurred by the reinsured under its policies and redistributes the premiums received by the reinsured, according to the reinsured’s own business needs:
1)Shifts risks from one insurer to another
2) Allows “sharing” of risks to reduce burden on a carrier
3)Frees up capacity for a carrier
4)Allows coverage of large risks or books of business
5)Reinsurance is often a “subscription” market
The Two Main Types of Reinsurance
• “FACULTATIVE” REINSURANCE
Reinsurance transacted on an individual risk basis.The ceding company has the option to offer an individual risk to the reinsurer and the reinsurer retains the right to accept or reject the risk.
• “TREATY” REINSURANCE
A transaction encompassing a block of the ceding company’s book of business. The reinsurer must
accept all business included within the terms of the reinsurance contract.
Characteristics of The Reinsurance Contract Types
FACULTATIVE:
• Individual risk review;
• Right to accept or reject each risk on its own merit;
• A profit is expected by the reinsurer in the short and long term and depends primarily on the reinsurer’s risk selection process;
• Adapts to short-term ceding philosophy of the insurer;
• A contract or certificate is written to confirm each transaction;
• Can reinsure a risk that is otherwise excluded from a treaty;
• Can protect a treaty from adverse underwriting results.
TREATY:
• No individual risk scrutiny by the reinsurer;
• Obligatory acceptance by the reinsurer of covered business;
• A long-term relationship in which the reinsurer’s profitability is expected but measured and adjusted over an extended period of time;
• Less costly than “per risk “reinsurance;
• One contract encompasses all subject risks
Forms of Reinsurance
• Pro Rata Reinsurance (Proportional)
Sharing concept – Ceding company and Reinsurer share premiums and losses in a determined percentage.
• Excess of Loss Reinsurance (Non-Proportional)
For a part of the premium, Reinsurers cover losses above a specified retention by the Ceding company, up to a predetermined limit.
the latest form of effecting reinsurance is on the excess of loss basis. any loss beyond the ceding company’s loss retention is to be borne by the excess of loss treaty reinsurers. this virtually means that the ceding company is interested on the full risk subject, arrangement of reinsuring on the excess of loss cover is found to be of particular advantage in motor insurance, public liability insurance and other classes of miscellaneous accident insurances involving liability insurance.