Reinsurance: A Comprehensive Guide 2023/24

Proportional Reinsurance:

In proportional reinsurance, the reinsurer assumes a fixed percentage of the ceding company’s liability for each insured event. This means that the reinsurer will pay a fixed proportion of the claims arising from each insured event, regardless of the size of the claim. For example, if the reinsurer agrees to cover 25% of the ceding company’s liability, then the reinsurer would pay 25% of the claims arising from each insured event.

Proportional reinsurance is often used to cover large-scale events, such as natural disasters, as it allows the ceding company to spread its risk across a broader pool of insurers. This type of reinsurance is also relatively simple to administer, as the reinsurer’s liability is directly linked to the ceding company’s original policy limits.

Non-Proportional Reinsurance:

In non-proportional reinsurance, the reinsurer’s liability is not linked to the ceding company’s original policy limits. Instead, the reinsurer assumes a specified maximum liability for each insured event or a specified maximum liability for a defined period.

For example, the reinsurer might agree to cover the first $1 million of losses for each insured event, or it might agree to cover up to $10 million of losses in a year.

Non-proportional reinsurance is often used to cover high-value or high-risk events, such as aviation accidents or medical malpractice claims. This type of reinsurance is also known as “excess of loss” reinsurance because it only comes into play after the ceding company has paid a certain amount of losses.

Excess of Loss Reinsurance:

Excess of loss (XOL) reinsurance is a type of non-proportional reinsurance that protects the ceding company from losses that exceed a certain threshold.

This threshold is known as the “retention” or “deductible.” For example, the ceding company might have a retention of $500,000, which means that it will be responsible for paying the first $500,000 of losses for each insured event.

After the retention is reached, the reinsurer will be responsible for paying any additional losses up to the agreed-upon limit.

XOL reinsurance is often used to protect insurance companies from the financial burden of large-scale losses. It is a popular choice for insurers who write policies for high-value assets, such as commercial buildings or expensive machinery.

Conclusion:

Reinsurance is a complex and highly regulated industry, and there are many different types of reinsurance contracts available. The specific type of reinsurance that is used will depend on the specific needs of the ceding company and the reinsurer. However, all types of reinsurance serve the same purpose: to help insurance companies manage risk and protect their financial stability.

Brookfield Reinsurance:

Treaty reinsurance is a type of reinsurance agreement in which an insurance company, known as the ceding company, agrees to cede a portion of its risk under a specific class of policies to a reinsurance company, known as the reinsurer.

The reinsurer, in turn, agrees to accept all risks within the specified class, even if they have not been individually underwritten. Treaty reinsurance is typically used for large volumes of business and is often used to cover risks that are difficult to predict or control.

Key Characteristics of Treaty Reinsurance:

• Broad Coverage: Treaty reinsurance provides coverage for a broad range of risks within a specific class of policies, eliminating the need for individual underwriting for each risk.

• Long-Term Commitment: Treaty reinsurance agreements typically have a predetermined duration, often several years, ensuring stability and predictability for both parties.

• Premium Payment: The ceding company pays a premium to the reinsurer in exchange for the assumption of risk. The premium is typically based on the expected loss ratio for the class of policies being ceded.

Types of Treaty Reinsurance:

• Proportional Treaty Reinsurance: In proportional treaty reinsurance, the reinsurer assumes a fixed percentage of the ceding company’s liability for each insured event. For example, if the reinsurer agrees to cover 25% of the ceding company’s liability, then the reinsurer would pay 25% of the claims arising from each insured event.

• Non-Proportional Treaty Reinsurance: In non-proportional treaty reinsurance, the reinsurer’s liability is not linked to the ceding company’s original policy limits. Instead, the reinsurer assumes a specified maximum liability for each insured event or a specified maximum liability for a defined period.

Benefits of Treaty Reinsurance:

• Risk Mitigation: Treaty reinsurance allows insurance companies to spread their risk across a broader pool of insurers, reducing their exposure to the financial impact of large-scale claims or catastrophic events.

• Financial Stability: Treaty reinsurance helps insurance companies maintain financial stability and solvency by providing a buffer against large payouts that could deplete their reserves.

• Expanded Capacity: Treaty reinsurance allows insurance companies to offer coverage for high-risk or high-value assets that they would not be able to cover on their own.

• Access to Expertise: Reinsurers often possess specialized expertise in specific industries or risk areas, which can benefit ceding companies by providing valuable insights and risk management strategies.

Examples of Treaty Reinsurance:

• Property and Casualty Insurance: Treaty reinsurance is commonly used in property and casualty insurance to cover large-scale losses arising from natural disasters, such as hurricanes, earthquakes, or floods.

• Life and Health Insurance: Treaty reinsurance is also used in life and health insurance to cover significant losses from high-value life insurance policies or group health insurance plans.

• Professional Liability Insurance: Treaty reinsurance is often used to cover the potential liabilities of professionals, such as doctors, lawyers, or engineers, in the event of malpractice claims.

Conclusion:

Treaty reinsurance plays a crucial role in the insurance industry, providing a mechanism for risk transfer, financial stability, and expanded capacity. By enabling insurance companies to share risk and access specialized expertise, treaty reinsurance contributes to the overall resilience of the insurance industry and safeguards businesses and individuals against the financial consequences of unforeseen events.