REINSURANCE

● Reinsurance:
● is a insurance that is Purchased by the
insurance company (Reinsurer) from an
insurer as a means of Risk Management,
to transfer the risk from insurer to reinsurer
● How does it work?
● Individuals and corporations Purchase insurance
from Insurance Companies
● Insurance companies in turn Purchase Insurance
from Reinsurance companies to transfer amount of
the risk
● Why Reinsurance:
●

● Stabilization of profitability:
● Purchasing reinsurance is particularly helpful
in smoothing the peaks and valleys of a captives loss
experience, as generally the law of large numbers
doesn't apply to captive operations
●
Provides large limit capacity
● Partnering with a reinsurer to accept a particularly high
risk allows the captive to provide lines of coverage and
limits that would otherwise not be feasible
●
● Catastrophe protection:
● Captives insure property-liability coverages which are
frequently concentrated in geographic or economic regions.
Catastrophic exposures such as hurricanes, industrial
explosions or the like can tremendously effect loss
experience. Purchasing "cat" coverage is therefore also related
to the stabilization function described above
● Supports high growth in premium volume
● As with any business, new endeavors are particularly risky.
As a company enters into a new line of business, geographic
region, or adds significant premium volume, it may wish to
purchase some kind of reinsurance. Risk retention groups, in
particular, may wish to temper the risk of accepting large
increases in premium volume, as their writings are generally
more sensitive to market forces than pure captives
● Benefits of Reinsurance:
●

● Reinsurance adds a further level of :

● Financial strength
● Stability to the financial guaranty market
● Manage their risk capacity
● By ceding risk to a reinsurer, the base of available
capital reserves is expanded.
●
● Two types of Reinsurance
● 1. Facultative Reinsurance
● 2. Treaty Reinsurance
● Facultative Reinsurance:
● is a specific reinsurance covering a single
risk , the reinsurer is reinsuring one
insured on a specific policy,Each
facultative risk is submitted by the insurer
to the reinsurer
●
● Treaty Reinsurance:
● is a method of Reinsurance requires the
insurer and Reinsurer to formulate and
execute a reinsurance contract then
Reinsurer covers all policies coming with
in the scope of contract
●
● Types of Reinsurance Contracts
●

● ASSUMED:
● The Insurance company which accepts the risks
● Ceded:
● The insurance company which Transfers or sends
out the risk to other Insurance company
●

● Primary Insurance company can be only ceded

company
● Reinsurance can be both Assumed and Ceded
Primary
Insurance Reinsurance Reinsurance
Treaty Company Treaty Company
Company

Cedent Reinsurer Retrocessionaire

Ceding Assuming Ceding Assuming

Retrocession
● Retention:
● The Amount of insurance risk which is
assumed by the Primary Insurance
company which is not Transferred to other
insurance company
●

● Retrocession:
● The amount of Reinsurance Risks
which is assumed by Reinsurance
company all or part of the risk is
transferred to the another Reinsurer
● Retrocedent:
● The amount of Insurance risk which is
assumed by the reinsurance company is
transferred to the other reinsurance
company
● Retrocessionare:
● The Reinsurer assumes all or part of
the risk which is accepted by the other
Reinsurer
● Two Basic Methods of Treaty Reinsurance
● 1.Quota Share
● 2. Excess of Loss
● Quota Share:
● that requires the insurer to transfer and
Reinsurer to accept a given Percentage of
every risk with in a defined category of
Business
●
● Excess of loss:
● is a method where by an insurer pays the
amount of claim for each risk upto the limit
determined in advance and Reinsurer
pays the amount of the claim above that
limit up to a specific sum
● Reinsurance Agreements:
●
Proportional Agreement:
● the primary insurer and reinsurer share the
liability risk proportionately. In the case of a quota
share agreement, the primary insurer and reinsurer
share in the premium and losses of a policy on a fixed
percentage basis
●

Non proportional Agreement:

● also known as excess of loss agreements, say that
in the case of a default, the primary insurer is liable
for a predetermined dollar amount of loss. Any losses
beyond that amount must be paid by the reinsurer up
to the limit of the agreement.
● Reinstatement:
● In the event of a claim under this Contract,
it is agreed that the amount of liability
hereunder is reduced from the time of the
occurrence of the loss by the sum payable
on such a claim. However, the amount so
exhausted is immediately reinstated from
the time of the occurrence of the loss.
Required Accounting
Flow Chart

Prospective Contract Retroactive

Risk No Risk Risk No Risk

Underwriting Deposit Retroactive Deposit

Accounting Accounting Accounting Accounting
(a)

(a) GAAP - Underwriting Accounting

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Prospective Contract -
A contract that covers future insurable events.

“Underwriting Accounting” or Traditional Reinsurance

Accounting

•Retroactive Contract -
•
• A contract that covers past insurable events.
•
• “Retroactive Accounting” -
• Same as old Loss Portfolio Accounting
- No Reduction in Loss Reserves
- Asset “Retroactive Reinsurance” - a write-in Contra Liability
- Gain or Loss recognized as “Other” - a write-in line
- Benefit reported as Special Surplus - restricted
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•If any contract does not meet Transfer of Risk analysis
•“Deposit Accounting”
- No reduction in Loss Reserves
- Gain not recognized until termination of
contract.

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