Buying reinsurance is a great way to insulate an insurance company from major claims. This is because reinsurance allows an insurance company to pass on a part of its insurance liabilities to another company. Having a reinsurance policy in place can also help a company to be sure that it will be able to pay its claims.
Excess-of-loss agreements
Often described as a side-car of reinsurance treaties, excess-of-loss agreements in reinsurance are designed to provide insurers with more security against major losses. These types of agreements limit coverage and provide the reinsurer with a specified amount of risk. Depending on the type of contract, the agreement may apply to a single policy, or to a number of individual policies.
There are two main types of excess-of-loss reinsurance agreements. One is non-proportional, and the other is proportional. While they can be used to cover a range of losses, they differ in several important ways.
Excess-of-loss agreements are different from facultative reinsurance in that they indemnify the primary insurer against loss. In contrast, the facultative reinsurance arrangement is typically proportional, meaning that the reinsurer and the primary insurer share in the losses.
The primary insurer is required to pay a predetermined dollar amount of loss. In some cases, the reinsurer is also required to pay a predetermined percentage of the loss. The reinsurer may not provide reinsurance for certain risks. Insurers are able to underwrite more risks and lower costs on solvency margins by transferring the responsibility for the claim to another insurer. Insurers can lower capital requirements to meet regulations.
Excess-of-loss reinsurance agreements may be pro-rata, meaning that the primary insurer and the reinsurer share the loss based on the policy limits. For instance, if the policy limit is $5 million, the primary insurer and the reinsurer share in the first dollar of loss, or $2 million.
Excess-of-loss contracts are also available for per-risk reinsurance, which is a special form of reinsurance that aims to protect against a single loss. It is similar to catastrophe reinsurance, which insures against a catastrophic event. Insurers can also choose to underwrite a variety of risks by selling them to institutional investors.
The United Property and Casualty Insurance Company and its affiliated companies in St. Petersburg, Florida, have a Third Property Catastrophe Excess-of-Loss Reinsurance Agreement, which is attached to their Schedule C. The reinsurance agreement is designed to protect the company against the cost of property damage caused by the hurricane.
Non-proportional reinsurance
Unlike proportional reinsurance, non-proportional reinsurance does not have a fixed percentage of premiums paid to the reinsurer. Instead, it is based on retention and claims. In general, non-proportional reinsurance is less costly for the reinsurer.
The type of reinsurance chosen depends on the type of risk and the level of cover desired. It can also be designed to include indemnification provisions. This allows a small insurance company to protect against losses and to remain solvent.
A basic reinsurance treaty is usually designed to provide coverage for risks within the terms of the contract. It may be a single reinsurance period or a continuous policy. It typically provides broad coverage to predefined portions of a specific business class. It will generally include an automatic renewal.
A proportional reinsurance contract is an agreement between the ceding insurer and the reinsurer. The reinsurer will agree to reimburse the ceding insurer for losses that exceed a specified amount.
There are many types of proportional reinsurance treaties with different advantages. In order to determine the appropriate type of reinsurance, the ceding insurer and the reinsurer should carry out a thorough assessment of the risk.
A proportional reinsurance treaty will also require a post-transfer relationship between the parties. This is necessary because the size of the risk is not known when the reinsurance begins.
There are three types of excess of loss cover. They are: horizontal, vertical, and stop loss. The main advantage of these forms of cover is that they limit the impact of losses. They also allow an insurance company to leverage its capital.
A proportional reinsurance agreement is one of the most commonly used forms of reinsurance. It is simple and easy to understand. However, it requires a careful evaluation of all risks and a detailed assessment of the premiums that are charged by the insured.
It is important for the reinsurer to err on the side of safety when calculating the premium. This will ensure that the policy is attractive to the insured.
Non-proportional reinsurance is more common among insurance companies. It is designed to cover the costs of claim settlement. This allows the insurer to absorb large losses while keeping itself afloat during major claim events.
Treaty reinsurance
Basically, treaty reinsurance is a pre-negotiated agreement between a ceding insurance company and a reinsurer. It is an important way to increase the stability of a ceding insurer. It also gives the cedent the benefit of a larger liquid asset and frees up the cedent’s capital.
In a treaty, the cedent agrees to cede a specified class of business to the reinsurer. The contract usually covers a group of policies over a period of time. In many cases, the reinsurance agreement is renewed every year.
The reinsurance company will cover the policyholder’s loss up to a certain amount. This limit can be specified in the contract or in a clause. The difference between the premium and the loss is known as the surplus. The “right to associate” clause in the contract refers to the reinsurer’s right to consult with the cedent in the event of a claim.
There are two main types of reinsurance contracts. One is a proportional contract and the other is a non-proportional contract. A proportional contract means that the reinsurer agrees to accept a certain percentage of the underlying risk. This can be expressed in terms of a retention or an annual loss limit.
A proportional contract may be used for property coverages or to satisfy solvency requirements. A non-proportional contract requires the reinsurance company to pay out excess claims. These are usually defined per event, per risk, or per number of lines.
A treaty reinsurance contract is a good way to protect an insurance business from a large loss. It allows the insurer to underwrite a greater volume of risk and offers a higher level of security. However, it can be burdened with inflexibilities.
Traditionally, reinsurance was used to shore up an insurer’s capital. However, reinsurance has been used for several other purposes as well. It is a useful tool for insurance businesses that lack economies of scale. It can also reduce the risks an insurance company takes on.
Treaty reinsurance is not ideal for covering large liability or catastrophic losses. Nevertheless, it can be very useful for insurers that are unable to underwrite at an adequate level.
Side-cars
Unlike traditional reinsurance tools, side-cars are private-backed, limited-duration reinsurance instruments that can provide investors with high returns. These instruments can be created by reinsurers, insurers, or third-party investors. Aside from the fact that they offer investors a chance to take advantage of low-risk business opportunities, side-cars also allow (re)insurers to expand their underwriting capacity without requiring them to increase capital.
A reinsurance sidecar is an arrangement between three parties – a reinsurer, a holding company, and an investor. The reinsurer takes responsibility for a certain percentage of the claims or losses, and the holding company sells equity to the investor. The reinsurance sidecar is usually fully-collateralized, meaning that it is able to pay claims.
These structures were introduced to the reinsurance industry in the early 1990s. At that time, the global reinsurance market was facing a difficult time. The hurricanes Katrina, Rita, and Wilma caused significant destruction and a shortage of reinsurance capacity. Investment bankers, hedge funds, and other private investors stepped in to fill the gap. These investors wanted a large share of the reinsurance premium.
Reinsurance side-cars are created to cover a certain amount of exposure, called a cedent, over a specific period of time. The sidecar contracts with a sponsoring reinsurer, which can be an existing reinsurer, another source of capital, or an entity. It is common for these structures to be permanent, but they may also focus on in-force business or new business.
The risks involved in sidecars are similar to those of quota-share treaties. In a reinsurance side-car, the reinsurer receives a prorated share of the premiums. The sponsoring reinsurer also receives commissions for procuring and profitability.
Because side-cars limit the investor’s liability to the amount of capital invested, they are attractive to private investors. They typically offer good returns between 20 and 30%. In addition, these investments provide an exit strategy if rates drop.
During the 2005 hurricane season, side-cars became very popular in the reinsurance market. They are an innovative tool that can help (re)insurers spread risk and reduce claim risk. They were originally introduced by insurance companies to cope with the losses resulting from the catastrophic events of the past several years.