If a person wants to cover his losses then he/she purchases an insurance policy. Similarly, insurance companies also want to cover their losses by means of purchasing insurance policy. It acts like an insurance cover for the insurance companies. These types of agreements where the insurer purchases an insurance policy are called Reinsurance Agreements. The insurance company which purchases the reinsurance policy is called “the ceding company” and the other party is known as “Reinsurer”. The reinsurance policy can be purchased by one or more than one reinsurer at any given time. The ceding company can purchase it directly or through a broker. It’s just a medium of risk sharing as risks and costs get spread. As like in insurance, the fee is called a premium, and under Reinsurance it is known as Reinsurance premium (paid by the ceding company after which the insurance policy is issued). The Reinsurer may be a specialist reinsurance company or any other insurance company.
Companies selling reinsurance refer to their businesses as “Assumed Reinsurance”. Reinsurers are the insurer of the last resort. Technically, one can say that under a contract of reinsurance, a reinsurance company agrees to indemnify the losses of aggrieved insurance companies. Some examples of Reinsurance companies are Munich Re, Swiss Re, Hannover Re etc. Some examples of brokers are Guy carpenter, Aon Corporation etc.
TYPES OF REINSURANCE:
- FACULTATIVE REINSURANCE:- These types of policies are only for an individual or a specified risk or contract. If you want to get reinsured for more than one policy then you have to negotiate it separately for each policy, but this is in the hands of the reinsurance company to accept or reject the facultative insurance. A facultative certificate is issued to the ceding company by the reinsurer after the purchase of the policy.
- TREATY REINSURANCE:- Under these types of policies, the coverage is in effect for a specific period of time, not on per risk or on contract basis. For the duration it covers all or portion of the risks that may be incurred by the insurance company being covered
- PROPORTIONAL REINSURANCE:- Under these types of policies, the reinsurer will receive a pro-rated share of the premium on all the policies sold by the reinsured. As a consequence of this, the reinsurer will also bear some part of loss on a pre-agreed percentage and will also reimburse the processing fee, Business acquisition and writing commission(also known as ceding commission).
- NON-PROPORTIONAL REINSURANCE:- Under these type of policies, the reinsurer get involved after the loss exceeds a specified amount. The limit is known as retention limit and that may be based on a single type of risk and a concentrated risk i.e. may be an entire business category.
- EXCESS OF LOSS REINSURANCE:-This is just a form of non-proportional reinsurance. Under this the reinsurer will get involved only when the loss exceed the retention limit. This is mainly for catastrophic events. It can be for per risk or for all the cumulative risks.
- RISK ATTACHING INSURANCE:-Only for the claims that are covered under the effective period of the reinsurance. No claims will be entertained outside the coverage period.
- LOSS OCCURING COVERAGE:- The reinsured company can claim all the losses during the span of reinsurance contract. Any losses after the contract expiration date will not be entertained.
The writer is a student at SSCBS, DU. The views expressed are based upon the analysis and research that the writer did on the topic from various books, reports and web articles. The writer regularly writes for Corporate Monks as a research associate. The writer takes personal responsibility for the ownership of the content shared and incase some sources have not been given credit, you can directly mail the writer email@example.com