Reinsurance: Understanding Insurer Insurance

Insurance companies are generally insured themselves. They transfer all or part of the risks they bear for their clients to a specialized establishment. This is the principle of reinsurance, the terms of which are explained in what is called the reinsurance treaty, a contract between the assignor (insurer) and the assignee (reinsurer). This has the advantage of strengthening the cash flow of the insurance company and allowing it to accept more guarantees, being itself covered. To understand this, let’s use an example. An insurer has homeowners among its customers whose region is particularly subject to natural risk. Without reinsurance and in the event of a large-scale loss, it would not be able to indemnify all of its customers. This is also the reason why climatic events, including hurricanes, worry the world of reinsurance. The alternative reinsurance of using the markets to insure against risk passed its first full-scale test with hurricanes Harvey and Irma in 2017.

Compulsory reinsurance or optional reinsurance

Two types of reinsurance must be separated. We speak of optional reinsurance when the insurer and the reinsurer are completely free to subscribe or not to a contract. In this case, the reinsurer studies the operations proposed by the insurance company. He verifies risk after risk and may choose to reinsure, or not, these insurance contracts. On the other hand, when the negotiation concerns a branch of insurance, the parties are required to commit. The insurer cedes the risks relating to this branch and the reinsurer must accept them. This is compulsory reinsurance. A reinsurance treaty is then recorded.

Proportional reinsurance or non-proportional reinsurance

When the risk is assumed by both the assignor and the assignee, the reinsurance is said to be proportional. Everyone then takes a share, both on the contributions and on the compensation. And it is still necessary to distinguish the quota-share treaty from the capital surplus treaty. The first invites the insurer to cede a percentage of premiums and an equivalent proportion of claims. For the second treaty, a guarantee threshold is defined. Below, the insurer intervenes alone. Above, the reinsurer takes over. But there is also non-proportional reinsurance when the insurer defines an amount that it undertakes to assume at the level of its load of claims or its loss. In the event of an excess of claims, the reinsurer will only cover claims beyond the determined retention threshold. In the event of an excess of loss, the assistance of the reinsurer will only be required if the claims/premiums ratio for the year reaches a certain level. Objective: to seek reinsurance if the insurer is at a loss. This type of contract is used in particular when natural disasters occur.

(By the editorial staff of the hREF agency)

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