What is Reinsurance?

December 26, 2018

person holding tablet with reinsurance displayed on screen

image credit: garagestock/shutterstock.com

Risk is everywhere; whether you are a contractor, small business or a large corporation, you must guard against risk. Insurance companies must also take measures to guard against risk. Reinsurance is when an insurance company transfers risk to other parties by a formal agreement-- thereby lessening its liability on catastrophic or multiple losses. It is insurance for insurers, and enables insurance companies to remain solvent after major claim events, such as hurricanes. 

Here is some information on two major types of reinsurance and how they work. 

 

Who is responsible for issuing reinsurance? 

The company that issues the reinsurance policy is called the “reinsurer.” The reinsurer can be either a specialist reinsurance company or simply another insurance company. The company that purchases the reinsurance policy is called a “ceding company” or “cedant.”  Like traditional insurance, the “cedant” pays a premium, which goes to the reinsurance company. 

 

There are two basic types of reinsurance:

Facultative Reinsurance: Coverage to protect an insurer for an individual or a specified risk or contract.  If there are multiple risks or contracts that need reinsurance, each is negotiated separately.

Treaty Reinsurance: Coverage is for a set time period instead of a per-risk or contract basis. There are two types of treaty reinsurance – proportional and non-proportional.  Under proportional reinsurance, one or more reinsurers take a shared percentage share of each policy that an insurer writes. The reinsurer receives the stated percentage of the premiums and will pay the same percentage of claims.

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. This amount is called a “retention” or “priority.”     

 

Reinsurance can be a complicated topic. At the end of the day, it allows insurers to lessen the impact of large claims, which ultimately allows them to assist more clients than they originally would have been able to do.

Want to know more about reinsurance? Contact TSIB today at 201-267-7500.

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Topics: Reinsurance

Written by The TSIB Team