• Risk transfer[edit] With reinsurance, the insurer can issue policies with higher limits than would otherwise be allowed, thus being able to take on more risk because some
  of that risk is now transferred to the re-insurer.

• Ultimately, a facultative certificate is issued by the reinsurance company to the ceding company reinsuring that one policy, and is used for high-value or hazardous risks.

• The ceding company may seek surplus reinsurance to limit the losses it might incur from a small number of large claims as a result of random fluctuations in experience.

• In such situations, the insurance company may find a local insurance company which is authorised in the relevant country, arrange for the local insurer to issue an insurance
  policy covering the risks in that country, and enter into a reinsurance contract with the local insurer to transfer the risks to itself.

• [5] Fronting[edit] Sometimes insurance companies wish to offer insurance in jurisdictions where they are not licensed, or where it considers that local regulations are too
  onerous: for example, an insurer may wish to offer an insurance programme to a multinational company, to cover property and liability risks in many countries around the world.

• In addition to its basic role in risk management, reinsurance is sometimes used to reduce the ceding company’s capital requirements, or for tax mitigation or other purposes.

• Because of the governance effect[clarification needed] insurance/cedent companies can have on society, reinsurers can indirectly have societal impact as well, due to reinsurer
  underwriting and claims philosophies imposed on those underlying carriers which affects how the cedents offer coverage in the market.

• • Reinsurers will often have better access to underwriting expertise and to claims experience data, enabling them to assess the risk more accurately and reduce the need for
  contingency margins in pricing the risk • Even if the regulatory standards are the same, the reinsurer may be able to hold smaller actuarial reserves than the cedant if it thinks the premiums charged by the cedant are excessively conservative.

• Reinsurance is insurance that an insurance company purchases from another insurance company to insulate itself (at least in part) from the risk of a major claims event.

• Depending on the regulations imposed on the reinsurer, this may mean they can hold fewer assets to cover the risk.

• Any claims from cedant underlying policies incepting outside the period of the reinsurance contract are not covered even if they occur during the period of the reinsurance
  contract.

• Fronting is also sometimes used where an insurance buyer requires its insurers to have a certain financial strength rating and the prospective insurer does not satisfy that
  requirement: the prospective insurer may be able to persuade another insurer, with the requisite credit rating, to provide the coverage to the insurance buyer, and to take out reinsurance in respect of the risk.

• However, reinsurer governance is voluntarily accepted by cedents via contract to allow cedents the opportunity to rent reinsurer capital to expand cedent market share or limit
  their risk.

• In catastrophe excess of loss, the cedant’s retention is usually a multiple of the underlying policy limits, and the reinsurance contract usually contains a two risk warranty
  (i.e.

• For example, an insurance company might insure commercial property risks with policy limits up to $10 million, and then buy per risk reinsurance of $5 million in excess of
  $5 million.

• However, even most reinsurance treaties are relatively short documents considering the number and variety of risks and lines of business that the treaties reinsure and the
  dollars involved in the transactions.

• So if the insurance company issues a policy for $100,000, they would keep all of the premiums and losses from that policy.

• This is usually one of the objectives of reinsurance arrangements for the insurance companies.

• In addition, the reinsurer will allow a “ceding commission” to the insurer to cover the costs incurred by the ceding insurer (mainly acquisition and administration, as well
  as the expected profit that the cedant is giving up).

• In general, the reinsurer may be able to cover the risk at a lower premium than the insurer because: • The reinsurer may have some intrinsic cost advantage due to economies
  of scale or some other efficiency.

• Contracts[edit] Most of the above examples concern reinsurance contracts that cover more than one policy (treaty).

• For example, an insurance company issues homeowners’ policies with limits of up to $500,000 and then buys catastrophe reinsurance of $22,000,000 in excess of $3,000,000.

• For example, it may only be able to offer a total of $100 million in coverage, but by reinsuring 75% of it, it can sell four times as much, and retain some of the profits
  on the additional business via the ceding commission.

• Types of reinsurance Proportional[edit] Under proportional reinsurance, one or more reinsurers take a stated percentage share of each policy that an insurer issues (“writes”).

• In the event of a loss, the policyholder would claim against the local insurer under the local insurance policy, the local insurer would pay the claim and would claim reimbursement
  under the reinsurance contract.

• Income smoothing[edit] Reinsurance can make an insurance company’s results more predictable by absorbing large losses.

• All claims from cedant underlying policies inception during the period of the reinsurance contract are covered even if they occur after the expiration date of the reinsurance
  contract.

• Creating a manageable and profitable portfolio of insured risks[edit] By choosing a particular type of reinsurance method, the insurance company may be able to create a more
  balanced and homogeneous portfolio of insured risks.

• Treaty Reinsurance means that the ceding company and the reinsurer negotiate and execute a reinsurance contract under which the reinsurer covers the specified share of all
  the insurance policies issued by the ceding company which come within the scope of that contract.

• Non-proportional[edit] 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”.

• If they issue a $200,000 policy, they would give (cede) half of the premiums and losses to the reinsurer (1 line each).

• Functions Almost all insurance companies have a reinsurance program.

• Reinsurance can also be purchased on a per policy basis, in which case it is known as facultative reinsurance.

• This enables them to use less capital to cover any risk, and to make less conservative assumptions when valuing the risk.

• [4] Arbitrage[edit] The insurance company may be motivated by arbitrage in purchasing reinsurance coverage at a lower rate than they charge the insured for the underlying
  risk, whatever the class of insurance.

• Reinsurance treaties are typically longer documents than facultative certificates, containing many of their own terms that are distinct from the terms of the direct insurance
  policies that they reinsure.

• However, many reinsurance contracts do include some commonly used provisions and provisions imbued[clarification needed] with considerable industry common and practice.

• In the past 30 years there has been a major shift from proportional to non-proportional reinsurance in the property and casualty fields.

 

Works Cited

[‘”Reinsurance”. Insurance Information Institute. 2014-01-12. Retrieved 2022-06-06.
2. ^ “What is Assumption Reinsurance? – Definition from Insuranceopedia”. Insuranceopedia.com. Retrieved 2022-06-06.
3. ^ Jump up to:a b Moorcraft, Bethan. “Facultative
and treaty reinsurance: What’s the difference?”. www.insurancebusinessmag.com. Retrieved 2022-06-06.
4. ^ “The Breadth and Scope of the Global Reinsurance Market and the Critical Role Such Market Plays in Supporting Insurance in the United States”
(PDF). U.S. Department of the Treasury. FEDERAL INSURANCE OFFICE, U.S. DEPARTMENT OF THE TREASURY. December 2014. Retrieved September 11, 2016.
5. ^ Reinsurance Professional’s Deskbook A Practical Guide. Thomson Reuters DRI. 2015. pp. Chapter 6.
6. ^
Powers, M. R. and Shubik, M., 2006, “A ‘Square-Root Rule’ for Reinsurance,” Revista de Contabilidade e Finanças (Review of Accounting and Finance), 17, 5, 101-107.
7. ^ Venezian, E. C., Viswanathan, K. S., and Jucá, Iana B., 2005, “A ‘Square-Root
Rule’ for Reinsurance? Evidence from Several National Markets,” Journal of Risk Finance, 6, 4, 319-334.
8. ^ Marcos Antonio Mendoza, “Reinsurance as Governance: Governmental Risk Management Pools as a Case Study in the Governance Role Played by
Reinsurance Institutions”, 21 Conn. Ins. L.J. 53, 68-70, 129 (2014) https://ssrn.com/abstract=2573253
Photo credit: https://www.flickr.com/photos/kurtbudiarto/7164500544/’]