reinsurance is a type of insurance that insulates insurance companies from major claims. In order to obtain reinsurance, an insurance company must purchase a reinsurance contract from another insurance company. Reinsurance contracts can be proportional, treaty, or non-proportional.
Non-proportional reinsurance
During the past thirty years, property and casualty reinsurance has been shifting from proportional to non-proportional reinsurance. The latter allows a ceding company to buy more cover and protect against the risk of financial collapse. However, this may result in high losses for the reinsurer.
Proportional reinsurance is a contract in which a reinsurer agrees to reimburse the ceding insurer for any losses that exceed a specified amount. However, the actual amount can vary depending on the size of the claim.
Non-proportional reinsurance is a less expensive way for a reinsurer to protect its portfolio. This form of reinsurance also requires the ceding company to report premiums and losses to the reinsurer. In exchange, the reinsurer is required to pay a stated percentage of the premiums that the insurer has paid.
A reinsurer will also be able to use less capital. This may be because of lower actuarial reserve requirements, or because of economies of scale. In addition, reinsurers may be able to operate under less regulation than their clients. This allows them to make more conservative assumptions.
In most cases, the premium is calculated as a rate applied to Gross Net Premium Income, or GNPI. However, some reinsurers will use a flat premium approach.
The ceding company will also pay a ceding commission. This commission will cover the expenses that the insurer incurs. Generally, the ceding commission is paid in proportions that are fixed in advance. This commission also serves as investment capital for the company.
In addition to the obvious, there are a number of non-proportional reinsurance contracts, such as Excess of Loss cover. Excess of Loss cover is usually a horizontal policy, which covers losses per risk. However, it can also be a stop loss policy, which covers losses per event.
Reinsurers can also provide protection contracts in the form of facultative reinsurance. This form of reinsurance allows the reinsurer to assess risks individually and participate in the underwriting decision. It is important for the reinsurer to have expertise in this form of reinsurance. In addition, the reinsurer may have a better risk appetite than the insurer.
Treaty reinsurance
Whether you are looking for protection against catastrophic losses, or if you are looking to reduce your risk capacity, treaty reinsurance can help. This type of insurance can provide you with the peace of mind you need to manage your business.
In a treaty reinsurance relationship, an insurance company known as the cedent agrees to cede a portion of their business to a third party, known as the reinsurer. In return, the reinsurer agrees to accept all risks that qualify under the terms of the agreement. This relationship typically lasts for a long period of time, and involves a higher volume of business.
In the treaty reinsurance relationship, the ceding company and the reinsurer agree on what risks are covered and how much risk they will take on. They also agree to pay out any excess claims. In addition to covering a predetermined amount of risk, the reinsurance company also agrees to pay a specified percentage of premiums.
Treaty reinsurance agreements can be written on a proportional or nonproportional basis. The proportional agreement requires the reinsurer to take a specified percentage of risk while the nonproportional agreement does not. Generally, the nonproportional arrangement is written for a specific risk class. However, a nonproportional treaty can also be written for an entire class of policies.
Treaty reinsurance gives the ceding company more security and stability, as well as the ability to underwrite a larger volume of business. Treaty reinsurance also makes large amounts of liquid assets available to insurers. Treaty reinsurance arrangements are typically written on a long-term basis, giving the ceding company the security they need to grow their business.
Treaty reinsurance is more common than facultative reinsurance. Treaty reinsurance is typically purchased by a senior executive at an insurance company. In comparison, facultative reinsurance is purchased by an insurance underwriter who wrote the original policy. Because of the longer-term nature of the relationship, the reinsurance company is able to more carefully vet the ceding company and ensure their risk appetites are aligned.
Treaty reinsurance is also less transactional. It involves a single contract covering a specific class of risk. Treaty reinsurance is less likely to involve rejected risks and is often available sooner than facultative.
Faculty reinsurance
Depending on your location, you may or may not have heard of faculty reinsurance. This type of insurance is usually deployed to cover the large, expensive or otherwise unusual risks, like the oil tanker mentioned above.
The primary insurer purchases cover for a defined block of risks, while the reinsurer agrees to cover the rest of the bill. While the oh so named reinsurer does its part, you still have to perform the requisite legwork to procure the necessary coverage. A co-insurance arrangement can be found in several lines of business, from health insurance to commercial auto insurance. The aforementioned one is the most obvious.
In its heyday, the Faculty reinsurance industry was all the rage, but the industry has cooled off a bit. Nonetheless, it is still a popular insurance industry niche in its own right. Several insurers are touting low rates, a good reason to consider faculty reinsurance in the first place.
The most important requisite is to find a reputable insurer, preferably with some international experience. In addition, the aforementioned insurer should be able to provide you with an appropriate application form and a well crafted reinsurance quote. You can then proceed to the next step, which is negotiating a suitable reinsurance contract.
A quick survey of the insurance industry revealed that there are more insurers offering faculty reinsurance than in previous years, and the trend seems to be increasing. This is perhaps a harbinger of change in the near future, as natural catastrophes and other disasters have made the reinsurance industry all the more competitive. The industry has also been helped along by a slew of smaller startups aiming to fill the void. It is also worth noting that the UAE has a reinsurance regulation allowing for facultative reinsurance.
While faculty reinsurance may not be the first thing you think of when it comes to a solid insurance protection, it is definitely the best bet for getting the job done. While the reinsurance industry has long been a monopoly, there have been signs of consolidation over the past few years, which should lead to the next generation of reinsurance products and services.
Industry loss warranty contract
During a catastrophic event, companies and investors may purchase Industry loss warranty contracts to help offset the financial losses associated with such an event. This type of contract is usually written by reinsurance companies or hedge funds. The contract outlines how the amount of compensation will be paid out when the financial losses associated with the insured industry reach a certain threshold. The amount of compensation will also depend on the trigger.
The contract can be purchased after the event has occurred or at the time of the event itself. This type of cover is a good way to diversify an investment portfolio. It can also help protect a cedant’s book of business in the event of a catastrophic event. It is not necessary to have sensitive information to purchase ILW cover.
During a catastrophic event, the number of properties damaged or destroyed can quickly escalate. This makes it difficult for an insurer to predict the total amount of industry loss. The amount of damage may not be accurately represented for several years. With a dead cat contract, the total amount of industry loss is not known until the event has occurred.
Industry loss warranties are typically used in the retrocession reinsurance market. They allow a buyer to receive the reinsurance accounting treatment. An Industry loss warranty contract guarantees a reinsurer payment of up to $100 million. When the trigger is triggered, the full contract limit is paid out to the warranty holder.
An Industry loss warranty contract is usually written annually. It is a less common alternative to a catastrophe bond. It may include a company indemnity trigger or a threshold for compensation. The trigger is based on a nominated index. In North American ILWs, the index is usually the Property Catastrophe Service (PCS).
While an Industry loss warranty is a good way to diversify an insurance portfolio, it does not come without controversy. The size of the market is estimated between $2bn and $10bn. The market does not have a recognized clearinghouse or exchange. The market has been impacted by the entry of hedge funds into the market. It is also not well understood.