Reinsurance Guide, Meaning , Facts, Information and Description
Reinsurance refers to the situations where insurance companies insure against losses they may incur.Insurance companies have a limited amount of capital and to protect this capital they will often cap the losses they may incur by purchasing reinsurance. Typically, the smaller the insurer the more reinsurance they will buy.
A number of different types of reinsurance are available. The two main types are proportional reinsurance and non-proportional reinsurance.
Proportional reinsurance is where the reinsurer takes a share of each loss the insurer incurs. The capital held by the insurer might only allow it to accept a risk with a value of $1 million but purchasing proportional reinsurance might allow it to, for example, double or triple its acceptance limit. Premiums and Losses are then shared on an equal basis.
Non-proportional reinsurance only pays if the loss suffered by the insurer exceeds a certain amount - the most common form of non-proportional reinsurance is called excess of loss reinsurance. An example of this form of reinsurance is where the insurer is prepared to accept a loss of, say, $1 million for any loss which may occur and purchases a layer of reinsurance of, say, $4m in excess of $1 million - if a loss of $3 million occurs the insurer pays the $3 million themselves and then recovers $2 million from the reinsurer. In this example, the insurer will incur for their own account any loss exceeding $5 million unless they have purchased a further excess layer (2nd layer)of say $5 million excess of $5 million.
Exess of Loss Reinsurance can have two forms - Per Risk or Catastrophe (Cat). In Per Risk the Insurance policy limits are exposed within the Reinsurance limits. for example, the insurance company might insure commerical property risks with policy limits up to $10 million, and then buy per risk reinsurance of $5 million xs $5 million. In Cat Excess the insurance policy limits must be less than the reinsurance retention. for example, an insurance company issues homeowner's policy limits of up to $500,000 and then buys cat reinsurance of $22,000,000 xs of $3,000,000. In that case, the insurance company would only recover from reinsurers in the event of multiple losses in one event (i.e hurricane, earthquake, etc.)
Many reinsurances are not placed with a single reinsurer but are shared between a number of reinsurers. The reinsurer who sets the terms (premium and policy conditions) for the reinsurance programme is called the lead reinsurer; the other companies subscribing to the programme are called follow reinsurers.
The reinsurance market is dominated by a small number of very large companies such as Munich Re, Swiss Re, Berkshire Hathaway (who own several reinsurers including General Re and Faraday) and Hannover Re. However, there are a wide range of smaller reinsurers who may lead reinsurance programmes less frequently but who may often participate as follow market.
Most of the above concerns reinsurance programmes or treaties that cover every risk accepted by the insurer of the type described in the reinsurance policy. However, reinsurance can be purchased on a per risk basis, in which case it is known as facultative reinsurance. The range of companies accepting facultative reinsurance is far wider than those underwriting treaty programmes.
Reinsurance companies themselves also purchase reinsurance and this is typically known as retrocessional cover.
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