Reinsurance is a means by which an insurance company can protect itself with other insurance companies against the risk of losses. Individuals and corporations obtain insurance policies to provide protection for various risks (hurricanes, earthquakes, lawsuits, collisions, sickness and death, etc.). Reinsurers, in turn, provide insurance to insurance companies. The company requesting the cover is called the cedant and the reinsurer can be called the ceded, although the latter term is not in common use.
Functions
There are many reasons why an insurance company would choose to reinsure as part of its responsibility to manage a portfolio of risks for the benefit of its policyholders and investors.
Risk transfer
The main use of any insurer that might practice reinsurance is to allow the company to assume greater individual risks than its size would otherwise allow, and to protect a company against losses. Reinsurance allows an insurance company to offer higher limits of protection to a policyholder than its own assets would allow. For example, if the principal insurance company can write only $10 million in limits on any given policy, it can reinsure (or cede) the amount of the limits in excess of $10 million.
Reinsurance’s highly refined uses in recent years include applications where reinsurance was used as part of a carefully planned hedge strategy.
Income smoothing
Reinsurance can help to make an insurance company’s results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage.
Surplus relief
An insurance company's writings are limited by its balance sheet (this test is known as the solvency margin). When that limit is reached, an insurer can do one of the following: stop writing new business, increase its capital, or buy "surplus relief" reinsurance. Buying reinsurance is usually done on a quota share basis and is an efficient way of not having to turn clients away or raise additional capital.
Arbitrage
The insurance company may be motivated by arbitrage in purchasing reinsurance coverage at a lower rate than what they charge the insured for the underlying risk, which can be in the area of risk associated with any form of the asset that is being issued or loaned against. It can be a car, a mortgage, an insurance (personal, fire, business, etc.) and alike.
In general, the reinsurer may be able to cover the risk at a lower premium than the insurer because:
- The reinsurer may have some intrinsic cost advantage due to economies of scale or some other efficiency
- Reinsurers may operate under weaker regulation than their clients. This enables them to use less capital to cover any risk, and to make less prudent assumptions when valuing the risk.
- Even if the regulatory standards are the same, the reinsurer may be able to hold smaller Actuarial reserves than the cedant if it thinks the premiums charged by the cedant are excessively prudent.
- The reinsurer may have a more diverse portfolio of assets and especially liabilities than the cedant. This may create opportunities for hedging that the cedant could not exploit alone. Depending on the regulations imposed on the reinsurer, this may mean they can hold fewer assets to cover the risk.
- The reinsurer may have a greater risk appetite than the insurer.
Reinsurer's expertise
The insurance company may want to avail of the expertise of a reinsurer in regard to a specific (specialised) risk or want to avail of their rating ability in odd risks.
Creating a manageable and profitable portfolio of insured risks
By choosing a particular type of reinsurance method, the insurance company may be able to create a more balanced and homogenous portfolio of insured risks. This would lend greater predictability to the portfolio results on net basis (after reinsurance) and would be reflected in income smoothing. While income smoothing is one of the objectives of reinsurance arrangements, the mechanism is by way of balancing the portfolio.
Managing cost of capital for an insurance company
By getting a suitable reinsurance, the insurance company may be able to substitute "capital needed" as per the requirements of the regulator for premium written. It could happen that the writing of insurance business requires x amount of capital with y% of cost of capital and reinsurance cost is less than x*y%. Thus more unpredictable or less frequent the likelihood of an insured loss, more profitable it can be for an insurance company to seek reinsurance.
Types
Proportional
Proportional reinsurance (the types of which are quota share and surplus reinsurance ) involves one or more reinsurers taking a stated percent share of each policy that an insurer produces ("writes"). This means that the reinsurer will receive that stated percentage of each dollar of premiums and will pay that percentage of each dollar of losses. In addition, the reinsurer will allow a "ceding commission" to the insurer to compensate the insurer for the costs of writing and administering the business (agents' commissions, modeling, paperwork, etc.).
The insurer may seek such coverage for several reasons. First, the insurer may not have sufficient capital to prudently retain all of the exposure that it is capable of producing. For example, it may only be able to offer $1 million in coverage, but by purchasing proportional reinsurance it might double or triple that limit. Premiums and losses are then shared on a pro rata basis. For example, an insurance company might purchase a 50% quota share treaty; in this case they would share half of all premium and losses with the reinsurer. In a 75% quota share, they would share (cede) 3/4 of all premiums and losses.
The other form of proportional reinsurance is surplus share or surplus of line treaty. In this case, a retained “line” is defined as the ceding company's retention - say $100,000. In a 9 line surplus treaty the reinsurer would then accept up to $900,000 (9 lines). So if the insurance company issues a policy for $100,000, they would keep all of the premiums and losses from that policy. If they issue a $200,000 policy, they would give (cede) half of the premiums and losses to the reinsurer (1 line each). The maximum underwriting capacity of the cedant would be $ 1,000,000 in this example. Surplus treaties are also known as variable quota shares.
Non-proportional
Non-proportional reinsurance only responds if the loss suffered by the insurer exceeds a certain amount, which is called the "retention" or "priority." An example of this form of reinsurance is where the insurer is prepared to accept a loss of $1 million for any loss which may occur and they purchase a layer of reinsurance of $4 million in excess of $1 million. If a loss of $3 million occurs,then insurer will retain 1 Million and will recover $2 million from its reinsurer(s). In this example, the reinsured will retain any loss exceeding $5 million unless they have purchased a further excess layer (second layer) of say $10 million excess of $5 million.
The main forms of non-proportional reinsurance are excess of loss and stop loss .
Excess of loss reinsurance can have three forms - " Per Risk XL" (Working XL), "Per Occurrence or Per Event XL" ( Catastrophe or Cat XL), and " Aggregate XL". In per risk , the cedant’s insurance policy limits are greater than the reinsurance retention. For example, an insurance company might insure commercial property risks with policy limits up to $10 million, and then buy per risk reinsurance of $5 million in excess of $5 million. In this case a loss of $6 million on that policy will result in the recovery of $1 million from the reinsurer.
In catastrophe excess of loss, the cedant’s per risk retention is usually less than the cat reinsurance retention (this is not important as these contracts usually contain a 2 risk warranty i.e. they are designed to protect the reinsured against catastrophic events that involve more than 1 policy). For example, an insurance company issues homeowner's policies with limits of up to $500,000 and then buys catastrophe reinsurance of $22,000,000 in excess of $3,000,000. In that case, the insurance company would only recover from reinsurers in the event of multiple policy losses in one event (i.e., hurricane, earthquake, flood, etc.).
Aggregate XL affords a frequency protection to the reinsured. For instance if the company retains $1 million net any one vessel, the cover $10 million in the aggregate excess $5 million in the aggregate would equate to 10 total losses in excess of 5 total losses (or more partial losses). Aggregate covers can also be linked to the cedant's gross premium income during a 12 month period, with limit and deductible expressed as percentages and amounts. Such covers are then known as "Stop Loss" or annual aggregate XL.
Risk-attaching Basis
A basis under which reinsurance is provided for claims arising from policies commencing during the period to which the reinsurance relates. The insurer knows there is coverage for the whole policy period when written.
All claims from cedant under
Senior Pet Insurance | Elderly Pet Insurance | Pet Insurance for old ...
Insure your dog or cat with our Senior Pet Insurance Plan, the only pet insurance on the market designed for pets 10 years and up.
Cat Insurance for Senior Pets, 24Petwatch Pet Insurance
Protect your older cat's health with illness and accident insurance designed for senior pets from 24Petwatch Pet Insurance. Cover against older cat illnesses and accidents, avoid ...
Pet Insurance for Senior Cats
Pet insurance designed specifically with senior cats in mind. Insure your older cat's health and protect against accidents and illnesses.
Pet Insurance for senior cats, lost cats andpet owner's that live in ...
Cat insurance options for people who have elderly cats, live in rental units and who want to protect their cat from unknown harm if they ever get lost.
Cat Insurance for Cat Health Care - 24Petwatch Pet Insurance
Cat Insurance to protect cat health from illness and accidents. Great Pet Health Insurance coverage, starting at less ... QuickCare Senior ; EmergencyCare ; TenantCare ; QuickCare Indoor
Pet Insurance coverage for senior cats, lost cats and pet owner's who ...
Great Insurance options for owners of senior cats, renters or lost pets. ShelterCare has coverage for everyone.
Senior Cat Insurance - Mature Cat Insurance from E&L Insurance - E&L ...
Low cost comprehensive Senior Cat insurance cover from EandL Insurance. Providers of Senior Cat health insurance and essential vet's fees cover. Lifetime cover provided for your ...
Cat Insurance for Senior Pets, PetCare Pet Insurance
Protect your older cat's health with illness and accident insurance designed for senior pets from Canada's number one pet insurer, PetCare Pet Insurance. Cover against older cat ...
QuickCare Senior - Program Details
Program Details We have designed our programs to provide you and your cat the protection you both deserve. The QuickCare Senior Program provides coverage for those accidents and ...
Senior Pets - E&L® Insurance
E&L ® senior pet insurance provides low cost comprehensive cover for dogs and cats. Vet fees cover up to £6,000 for accident and illness; 20% online discount for senior pet insurance