image credit: garagestock/shutterstock.com
Reinsurance is when an insurance company transfers risk to other parties by a formal agreement—thereby lessening its liability on catastrophic or multiple losses. Essentially, it can be defined as insurance for insurers, and it enables insurance companies to remain solvent after major claim events such as hurricanes.
It's important to know that both Treaty and Facultative reinsurance policies can be proportional or non-proportional in structure. Here are some differences between proportional and non-proportional reinsurance that your insurance company should know.
What is Proportional Reinsurance (Pro Rata)?
A proportional reinsurance agreement, also known as “Pro Rata” reinsurance, obligates the reinsurer to share a percentage of the losses. The reinsurer receives a prorated share of the insurer’s premiums. For example, a proportional reinsurance agreement may require a reinsurer to cover 60% of losses.
What is Non-Proportional Reinsurance (Excess of Loss)?
Non-proportional reinsurance agreements, also known as “excess of loss” reinsurance, require the reinsurer to only pay out if the claims suffered by the insurer exceed a stated amount. This amount is called a “retention” or “priority.” For example, an insurance company could seek a reinsurance agreement that will cover all losses from a natural disaster in excess of $1 Billion or, alternatively, that agreement could cover $500,000 excess of $500,000 in a single $1 Million loss.
Reinsurance can be a complicated topic to understand. At the end of the day, it allows insurers to lessen the impact of losses. As a result, this ultimately strengthens the insurer’s financial position and allows them to leverage their capital position.
Want to know more about reinsurance or other insurance services? Contact TSIB today at 201-267-7500. You may also click below to view more blog posts from TSIB!