Reinsurance is an insurance product for insurance companies, enabling them to transfer some of their risks to a reinsurance company. By removing some of the risks from its own books, an insurance company can take on more business, diversify its risks, and safeguard itself from an unusual event, such as a major hurricane in its coverage area, that might otherwise threaten its solvency. Ceding part of its risk portfolio also reduces the amount of capital reserves the insurer is legally required to maintain to ensure it can be accountable to all of its policyholders. There are several types of reinsurance.
Assumption Reinsurance
As the name applies, assumption reinsurance is a category of reinsurance in which the reinsurer steps into the shoes of and assumes the liabilities and responsibilities of the ceding insurer. The assumption reinsurer becomes directly liable to the policyholders and receives all premiums directly from the policyholders. Assumption reinsurance, which typically requires approval from affected policyholders, is not nearly as common as indemnity reinsurance.
Indemnity Reinsurance
With indemnity reinsurance, the indemnity reinsurer agrees to indemnify, or reimburse, the ceding insurer for a specified percentage of the claims and expenses arising from the reinsured risks. Indemnity reinsurance is typically available on either a “pro rata” or “excess of loss” basis.
Pro Rata Reinsurance
Pro rata reinsurance is also called proportional reinsurance. With this type of arrangement, the reinsurer agrees to indemnify the ceding insurer for a percentage of all losses from the original risk in exchange for a corresponding portion of the premiums for the original risk. Common types of pro rata reinsurance arrangements include quota share reinsurance and surplus share reinsurance. Quota share reinsurance indemnifies the ceding insurer for a fixed percentage of loss for all of its policies that are of a specified type. When there is a surplus share reinsurance agreement, the ceding insurer retains a fixed amount of liability for the underwritten amount and transfers the remaining liability to the reinsurer.
Excess of Loss Reinsurance
With an excess of loss reinsurance contract, the reinsurer agrees to indemnify the ceding insurer for all or a stated portion of loss in excess of a stated retention. Excess of loss reinsurance can take several forms. These include “per risk” or “specific excess” reinsurance, in which the ceding insurer is reimbursed for the amount of loss in excess of a specified retention for each covered risk. With “per occurrence” reinsurance, the reinsurer indemnifies the ceding insurer for the amount of loss above a specified retention for each occurrence. With “aggregate excess of loss” reinsurance, the ceding insurer is reimbursed for losses that exceed a specific dollar amount or percentage of premiums during a specific period.
Treaty Reinsurance
A treaty reinsurance contract refers to an ongoing agreement between an insurer and a reinsurer. With this type of contract, the insurer is obligated to cede and the reinsurer is obligated to accept all or part of the risks that the insurer incurs over a set period, in accordance with the terms and conditions of the treaty.
Facultative Reinsurance
Facultative coverage refers to reinsurance protection for an individual risk or contract. If the insurer wants reinsurance for additional risks or contracts, those are negotiated separately. Facultative reinsurance is so-named because the reinsurer has the option or “faculty” to accept or reject each risk offered by the ceding insurer.
If you are involved in a dispute with your business insurance company, contact Schwartz Conroy & Hack. We have the expertise, experience and tenacity to make insurance companies keep their promises to you and your business.
