Education

A Reinsurance "Primer"
  1. Put simply, reinsurance is "insurance for insurance companies". Just as you might buy an insurance policy to cover your car, insurance companies bundle up their risks and buy, in effect, one large "policy" or "treaty".
  2. However, reinsurance also serves other needs including catastrophic protection, large line capacity, stabilization of loss experience, surplus relief, program business, etc…. Typically, an insurance company (or "ceding company") cedes risk to a reinsurance company to serve these purposes.
    1. Catastrophic Protection: insurers might want to purchase protection from, say, a hurricane hitting a cluster of their homeowners in Florida. So, an insurer would bundle their risks in that area and then buy protection via reinsurance.
    2. Large Line Capacity: often, insurers are precluded by regulatory bodies from writing any single limit in excess of a certain ratio to their surplus. So, reinsurance is utilized on a "one-off" (or "Facultative") basis to cover these risks.
    3. Stabilization of Loss Experience: reinsurance can be utilized to prevent any "spikes" in loss results from year to year.
    4. Surplus Relief: insurers are precluded by rating/regulatory bodies from exceeding certain premium to surplus ratios. However, reinsurance can assist in lowering these leverage ratios (typically on a short term basis) by the cession of premium and risk on a first-dollar basis or via aggregate protection.
    5. Program Business: many insurance companies use Managing General Agents as, in effect, branch offices. The MGA produces and underwrites risk on the insurance company’s behalf. In the "soft" market, many insurers acted as "fronts" in that they took little or no risk. (The risk was a "pass-through" to the reinsurer.) In the current market environment, reinsurance is still pivotal to many of these placements but reinsurers now typically require involvement in the risk from both the MGA (underwriter) and the insurance company.
  3. There are two main types of reinsurance treaty - Proportional and Non-Proportional:
    1. Proportional treaties (also called "Quota Share"): allow that the insurer and reinsurer will share the premium and loss in some determined ratio. For instance, a 20% Quota Share treaty would mean that the reinsurer would co-participate on 20% of the first dollar loss up to the limit of the treaty in return for 20% of the premium (less the insurer’s expense factor). In return, the insurer co-participates on 80% of the risk for 80% of the premium.
    2. Non-Proportional Treaties (also called Excess of Loss): The reinsurer pays a portion of the loss when it exceeds the insurance company’s retention. (Retention is similar to the deductible on an insurance policy.) The reinsurer negotiates a premium rate intended to cover the risk of loss. For instance, a $500,000 excess of $500,000 treaty would call for the insurer the pay the first $500,000 of loss (retention) and then the reinsurer would pay the $500,000 limit EXCESS of the $500,000 retention

This is, obviously, a very simple "primer" on reinsurance. We have experience in the successful placement of numerous types of reinsurance and would be delighted to discuss ways in which reinsurance might (or might not) be helpful to you. As always, we treat each discussion in the strictest confidence.