Reinsurance: Types, Purposes, Benefits, and More - GLOBAL Insurance (2024)

FAQs

What are the different types of reinsurance in insurance? ›

In simple terms, reinsurance could be defined as insurance for insurance companies. There are several types of insurance. They include proportional reinsurance, non-proportional reinsurance, excess-of-loss reinsurance, facultative reinsurance, and treaty reinsurance.

Several common reasons for reinsurance include: 1) expanding the insurance company's capacity; 2) stabilizing underwriting results; 3) financing; 4) providing catastrophe protection; 5) withdrawing from a line or class of business; 6) spreading risk; and 7) acquiring expertise.

Insurers purchase reinsurance for essentially four reasons: (1) to limit liability on specific risks; (2) to stabilize loss experience; (3) to protect against catastrophes; and (4) to increase capacity.

Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit their own total loss in case of disaster. By spreading risk, an insurance company takes on clients whose coverage would be too great of a burden for the single insurance company to handle alone.

Facultative reinsurance and reinsurance treaties are two types of reinsurance contracts. When it comes to facultative reinsurance, the main insurer covers one risk or a series of risks held in its own books. Treaty reinsurance, on the other hand, is insurance purchased by an insurer from another company.

Three reinsurance methods are usual: Treaty Reinsurance, Facultative Reinsurance and a hybrid mode with elements from the Treaty and the Facultative. This is the most common cession method within the reinsurance market.

Insurance is a legal agreement between an insurer and an insured in which the former guarantees to defend the latter in the event of damage or death. Reinsurance is the insurance a firm purchase to lessen severe losses when it decides not to absorb the entire loss risk and instead shares it with another insurer.

From an investment perspective, reinsurance serves primarily as an income-producing asset. Investors pool money in a reinsurance fund that, in turn, provides coverage to back the risk carried by other insurers. Those insurers pay premiums for the coverage, generating an income stream for investors.

Reinsurance allows insurance companies to stay solvent by restricting their losses. Sharing the risk also enables them to honour claims raised by people without worrying about too many people raising claims at one time.

Reinsurance is “simply an insurance policy issued to an insurer.” an insurer to a reinsurer of the risk assumed under all or a portion of a policy or a group of policies. The relationship between the original insurer, known as the ceding insurer or cedent, and the reinsurer is contractual.

What type of risk is reinsurance? ›

Definition: Reinsurance risk refers to the inability of the ceding company or the primary insurer to obtain insurance from a reinsurer at the right time and at an appropriate cost. The inability may emanate from a variety of reasons like unfavourable market conditions, etc.

Under proportional reinsurance, a reinsurance company takes on a percentage of the risk for each policy the insurer sells. They also receive a percentage of the premiums paid for that policy. Alpha Insurance Company has a reinsurance policy from Zeta Reinsurance.

Risk Premium Under this method of reinsurance the company reinsures the death risk only, retaining itself all reserves and hence all interest and expense profits as well as paid-up policies and surrender values. It is necessary to define the sum to be reinsured.

Reinsurance can be divided into two basic categories: treaty and facultative. Treaties are agreements that cover broad groups of policies such as all of a primary insurer's auto business.

While they are both forms of reinsurance, facultative considers each policy individually and generally indicates a shorter term relationship. Treaty, on the other hand, considers multiple policies of a specific class of insurance issued by an insurance company and indicates the companies will work together longer term.

Types of reinsurance include facultative, proportional, and non-proportional.

For example, let's assume a major concert venue purchases a commercial umbrella liability insurance policy with a coverage limit of $10 million. The insurance company writing the policy may contact a reinsurer to cover a portion of its financial responsibility.