Kathmandu. Reinsurance is insurance for insurance companies. Reinsurance is the process of transferring the financial burden of some of the risks accepted by an insurer through an insurance contract with the insured to another insurance company or reinsurer.
Across the world, it is customary for insurers to accept risks directly from the insured and retain some of such risks and transfer the rest to reinsurers. By doing this, insurers can accept more risk than they can afford and receive support from reinsurers in the event of a major disaster or large claim payment in the future.
Reinsurance can be divided into two basic categories – treaty reinsurance and voluntary reinsurance. There are also reinsurance contracts, but only two basic types of reinsurance are described here.
##Treaty reinsurance
Treaty reinsurance is a broad contract that covers a wide range of insurance policies such as term, temporary, small, property, motor insurance, etc., of a primary insurer. In contrast, voluntary reinsurance covers insurance of specific individuals, usually high-risk, large projects or subject to special risks, which are not normally accepted under treaty reinsurance.
In most treaty contracts, once the terms of the contract are established, including the classes of risks assumed, all policies – in many cases both new and old – that fall within those terms are automatically assumed by the reinsurer. Such transfer of risk continues to be automatically transferred to the reinsurer until the reinsurance treaty is cancelled.
##Voluntary reinsurance
In this, the reinsurer must specifically assess the ‘risk’ inherent in each insurance policy offered by the insurer. The reinsurer has the full right to reject such an insurance offer. Just as the insurer has to bear the risk of a hospital, it looks at the attitude and background of the hospital towards all aspects of its operation and safety. In addition, the reinsurer also considers the attitude and management of the insurer seeking reinsurance coverage. This type of reinsurance must be accepted in writing by the reinsurer each time. This is because the reinsurer has the right to accept or reject all or part of any policy offered, unlike treaty reinsurance, under which it must accept all applicable policies once the contract is signed.
Contract and Acceptance Reinsurance contracts can be structured on a ‘proportional’ (proportional) or ‘excess loss’ (non-proportional) basis, depending on the loss-profit sharing arrangement between the two insurers.
Proportional contracts are often applied to property insurance. The reinsurer and the primary insurer share both the premiums received from the insured and the potential losses.
In an excess loss agreement, the primary insurer retains a certain amount of liability for losses (retention) and pays the reinsurer a reinsurance premium for the risk above that amount, usually subject to a certain upper limit. Excess loss agreements may apply to individual policies, events such as hurricanes that affect multiple insureds, or to total losses of the insured above a certain amount per policy or per year.
A primary insurer’s reinsurance program can be very complex. In simple terms, if you were to outline it, it would look like a pyramid with increasing amounts of risk assumed for increasingly distant events. It is divided among several reinsurance companies, each taking a share. This will include layers of proportional and excess loss treaties and possibly a voluntary excess loss tier on top.
Source: Insurance Information Institute
