Reinsurance

Is a risk management practice in which an insurance company (called the ceding insurer or cedant) transfers part of its risks to another insurance company (called the reinsurer) in exchange for a premium. The primary purpose of reinsurance is to protect the ceding insurer from significant financial losses, stabilize its financial performance, and enhance its capacity to underwrite more policies.

Types of Reinsurance

1. Proportional Reinsurance:
   In this type, the reinsurer shares a fixed percentage of both the premiums and claims with the ceding insurer.
• Quota Share: The ceding insurer and reinsurer agree to share all risks and premiums in a fixed proportion.
• Surplus Share: The reinsurer covers risks that exceed a certain retention limit of the ceding insurer.
2. Non-Proportional Reinsurance:
   In this type, the reinsurer only pays for claims that exceed a certain amount, known as the retention or priority limit.
• Excess of Loss (XOL): The reinsurer compensates for losses exceeding the agreed threshold, often used for catastrophic events.
• Stop-Loss: The reinsurer covers aggregate losses that exceed a specified amount, protecting the insurer from cumulative losses.
3. Facultative Reinsurance:
   This is a case-by-case agreement where the ceding insurer transfers a specific risk or policy to the reinsurer. It is suitable for high-value or unique risks.
4. Treaty Reinsurance:
   This is a comprehensive agreement in which the reinsurer agrees to cover all policies of a specific type or category issued by the ceding insurer.
• Automatic Treaty: Risks are automatically ceded without individual negotiation.
• Optional Treaty: Risks are ceded based on mutual consent for each policy.

Retrocession:
This occurs when a reinsurer transfers part of its assumed risks to another reinsurer, further spreading the risk.