Reinsurance

Reinsurance

Definition: The practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The intent of reinsurance is for an insurance company to reduce the risks associated with underwritten policies by spreading risks across alternative institutions.

Different types of Reinsurance:

1) Facultative Coverage

2) Reinsurance Treaty

3) Proportional Reinsurance

4) Non-Proportional Reinsurance

5) Excess-of-loss Reinsurance

6) Risk-attaching Reinsurance

7) Loss-occurring Coverage

However, the most two common types of reinsurance are proportional and non-proportional reinsurance.

* Proportional reinsurance: under proportional reinsurance, one or more reinsurers take a stated percentage share of each policy that an insurer produces (“writes”). This means that the reinsurer will receive that stated percentage of the premiums and will pay the same percentage of claims. In addition, the reinsurer will allow a “ceding commission” to the insurer to cover the costs incurred by the insurer (marketing, underwriting, claims etc).

* Non-proportional reinsurance: under non-proportional reinsurance the reinsurer only pays out if the total claims suffered by the insurer in a given period exceed a stated amount, which is called the “retention” or “priority”.

When comparing reinsurance, some used several scenarios:

1) 1st casualty excess

2) 2nd casualty excess

3) APD quota share

4) Property catastrophe

5) Multi-line excess

6) Property excess

7) Aggregate excess of loss ratio

8) Ceded premium

Top Reinsurance Company

1) Munich Re

2) Swiss Re

3) Hannover Re

4) Berkshire Hathaway/general Re

5) Lloyd’s of London

6) SCOR

7) Reinsurance Group of America

8) China Reinsurance Group

9) Partner Re

10) Korean Reinsurance Company

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