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Reinsurance Concepts

What Is Reinsurance

Reinsurance is a transaction where by one insurance company (the

“reinsurer”) agrees to indemnify another insurance company (the
“ceding” or “primary” company) against all or part of the loss that
the latter sustains under a policy or policies that it has issued. For
this service, the ceding company pays the reinsurer a premium.
Insurance Vs Reinsurance

Insurance Reinsurance
• Contract between an insurer • Contract between two
& a member of the public insuring organizations
• Insurer deals with the insured • Reinsurer deals with the
• Subject matter of insurance insurer
is property, person, benefits • Subject matter of reinsurance
or potential legal liability is defined portion of ceding
company’s contractual
Functions Of Reinsurance
• CAPACITY : Allows the reinsured to write larger amounts of
• CATASTROPHE : Protects the reinsured against a single,
catastrophic loss or multiple large losses.
• STABILIZATION : Helps smooth the reinsured’s overall operating
results from year to year.
• FINANCIAL : Eases the strain on the reinsured’s surplus during
rapid premium growth.
Functions Of Reinsurance

• WITHDRAWAL : Provides a means for the reinsured to withdraw from

a line of business or geographic area or production source.
• MARKET ENTRANCE : Helps the reinsured spread the risk on new
lines of business until premium volume reaches a certain point of
maturity; can add confidence when in unfamiliar coverage areas.
• EXPERTISE : Provides the reinsured with a source of underwriting
information when entering a new line of insurance or a new market.
Who Writes Reinsurance
• DIRECT WRITERS : From reinsurance relationships directly with the
ceding company.
• BROKER-MARKET REINSURERS : Assume business through
reinsurance brokers (“intermediaries”) who provide the production or
sales support. The broker negotiates and purchases the reinsurance
protection on behalf of the primary company, and receives a brokerage
commission from the assuming reinsurance companies used by the
• REINSURANCE DEPARTMENTS : Primary company’s professional
reinsurance department that assumes reinsurance business.
Reinsurance Terms
• CEDE : to transfer part of the risk to another insurer
• CEDING COMPANY : the company that transfers or cedes risks to
another company.
• ACQUISITION COSTS : all expenses incurred by an insurance or
reinsurance company that are directly related to acquiring insurance
accounts (insured, or reinsured) for the company.
• ASSUME : to accept all or part of ceding company’s insurance or
reinsurance on a risk or exposure.
• BINDER : A record of reinsurance arrangements pending the issuance
of a formal reinsurance contract (which then replaces the binder)
Reinsurance Terms
• BORDEREAU : A form providing premium or loss data with respect to
identified specific risks which is furnished the reinsurer by the reinsured
• BURNING COST : The ration of actual past reinsured losses to the
ceding company’s subject matter premium (written or earned) for the
same period; used to analyze past reinsurance experience or to project
future reinsurance experience.
• RETROCESSIONNAIRE : The assuming reinsurer in a retrocession,
where the ceding reinsurer is known as the retrocedent
Reinsurance Terms
• CONTINGENCY COVER : Reinsurance protection against the unusual
combination of losses.
• PREMIUM (Written/Unearned/Earned): Written premium is premium
registered on the books of an insurer or reinsurer at the time a policy is
issued and paid for. Premium for a future exposure period is said to be
unearned premium for an individual policy, written premium minus
unearned premium equals earned premium. Earned premium is income
for the accounting period, while unearned premium will be income in a
future accounting period
Reinsurance Terms
Outstanding : Losses (reported or not reported) that have occurred but
have not been paid
Paid : The amounts paid to claimants as insurance claim settlements.
Incurred : In insurance accounting, an amount representing the losses
paid plus the change (positive or negative) in outstanding loss reserves
within a given period of time
• POOL : Any joint underwriting operation of insurance or reinsurance in
which the participants assume a predetermined and fixed interest in all
business written.
Reinsurance Terms
• FRONTING : An arrangement whereby one insurer issues a policy on a
risk for, and at the request of, one or more other insurers with the intent
of passing the entire risk by way of reinsurance to the other insurer(s).
Such an arrangement may be illegal if the purpose is to frustrate
regulatory requirements.
• SYNDICATE : An association of individuals or organizations to pursue
certain insurance objectives. For example, individual underwriters in
Lloyd’s of London associate in separate syndicates to write marine
insurance, reinsurance life insurance, etc., entrusting the administrative
details of each syndicate to a syndicate manager.
Reinsurance Working





(Ceding Company)


Reinsurance Organization
• Insurance Companies

• Reinsurers

• Reinsurance Pools

• Lloyd's

• Self-Insurers
Type 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
Treaty vs. Facultative Reinsurance
Treaty Facultative
• Formal agreement for a • Separate contract for each
certain line of business policy
• Participates in all risks • Does not participate in all
within the treaty risk
• Involves less paper work • Involves more paper work
• Insurers have to cede even if • Insurer has choice to retain a
they can retain risk completely
• Obligatory acceptance by the • Righty to accept or reject
reinsurer of covered business each risk on its own merit
Reinsurance Agreements
Pro Rata

A term describing all forms of quota share and surplus reinsurance in

which the reinsurer shares the same proportion of the premium and losses
of the ceding company. This also is called a “Proportional” agreement.

Advantages Premium
•Good protection against 60% Rein
40% Net

frequency/severity potential

•Protection of net retention on first-

dollar basis 40% Net
60% Rein Losses
•Permits recovery on smaller losses
Reinsurance Agreements
Pro Rata

Quota Share

The Ceding Company cedes a fixed percentage of each policy written in a

defined line of business to the reinsurer

Surplus Share

The Ceding Company sets a unique retention amount for each type of risk
to be reinsured under the treaty
Reinsurance Agreements
Excess of Loss
A term describing a reinsurance transaction that, subject to a specified
limit, indemnifies a ceding company against the amount of loss in excess
of a specified retention.
•Good protection against
frequency/severity Excess of
potential,depending upon the Retention

retention size

•Allows a greater net premium Reinsurer $

Negotiated Reinsurer $
retention Retention of
•More economical in terms of
reinsurance premium and cost of
Reinsurance Agreements
Excess of Loss
Per-Risk Excess of Loss
Reinsurer participates in excess of a predetermined amount for each risk

Per-Risk Aggregate Excess of Loss

Reinsurer participates over aggregate claims for a risk in a specified period
of time

Per-Occurrence Excess of Loss

Reinsurer participates over a predetermined amount for all losses arising
out of one event or occurrence, irrespective of the number of risks

Aggregate Excess of Loss

Reinsurer participates over a predetermined aggregate limit of loss for a
collection of risk over a specified period of time
Top Leading Companies

Net Premium Written

Rank Group Or Company
(in Million $)
1 Swiss Re 13,375.00
2 Munich Re 12,138.00
3 Employers Reinsurance Corporation 8,239.00
4 General Cologne Re 7,717.00
5 Lloyd's 3,806.00

As of September 2000 : Source by

Reinsurance Underwriting Report

Net Premium Written

Rank Group Or Company
(in Million $)
1 General Re Group 3,959.69
2 Employers Reinsurance Corporation 3,706.70
3 American Re 2,761.56
4 Transatlantic/Putnam Reinsurance Co. 1,764.10
5 Swiss Reinsurance America Corporation 1,647.18
6 St. Paul Re 1,494.38
7 Everest Reinsurance Company 1,360.65
8 Berkshire Hathaway Reinsurance Group 1,216.51

As of 31 December 2001 : Statutory Results by RAA on 21 March 2002

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