Reinsurance, General Insurance

Reinsurance, General Insurance

Reinsurance provides financial cover to insurance companies in case of substantial losses suffered by them. Through reinsurance, insurance companies can spread and share the risk of losses with another company. This general insurance policy is especially useful when insurance companies face the risk of paying numerous claims simultaneously, for example when a natural disaster strikes. In such situations, there is a high risk of insurance companies going bankrupt.
Reinsurance: Types

Reinsurance policies are of several types:

      1. Proportional: In this type of insurance, reinsurers receive a specific share of risks and premiums on each policy that an insurer underwrites.

      2. Non-proportional (Excess of Loss): In this type of insurance, an insurer takes on all the losses till a specific limit (retention) is reached. After that level, the reinsurer takes on all the losses.

      3. Risk-attaching basis: In this type, a reinsurer accepts only those claims that were made for policies bought before the reinsurance policy started.

      4. Claims-made basis: This policy covers all claims reported to an insurer within the policy period, irrespective of when the event causing the loss occurred.

      5. Loss-occurring basis: This is a type of reinsurance policy, wherein all claims occurring during the period of a contract, regardless of the time when the policy was bought, are covered. Losses due to any claims made after the expiry of a contract are not covered.

There are Several Types of Proportional Reinsurance Policies:

      1. Quota share: Through this insurance, an insurer cedes a specific percentage of losses and premiums. For example, an insurance company can purchase a 50% quota share treaty and share half of all premiums and losses with the reinsurer.

      2. Surplus reinsurance: Through this insurance, an insurance company cedes those insurances where risks are higher than a specified amount.

Following are the Types of Non-Proportional Reinsurance Policies:

      1. Per risk: In this type, an insurance company might insure a policy with a specific limit and then buy per risk reinsurance to cover losses of more than a limit within the policy. For example, a company might reinsure policies with limits up to $5 million and then buy a reinsurance policy of $3 million in excess of $2 million. This way if it receives a claim of $4 million, it can recover $2 million from its reinsurer.

      2. Per occurrence: Also called catastrophe excess of loss, this policy has insurance policy limits less than the reinsurance retention.