introduction to re insurance

8/8/2019 Introduction to Re Insurance

http://slidepdf.com/reader/full/introduction-to-re-insurance 1/20

REINSURANCE



● Reinsurance:

● is a insurance that is Purchased by theinsurance company (Reinsurer) from aninsurer as a means of Risk Management,to transfer the risk from insurer to reinsurer

● How does it work?

● Individuals and corporations Purchase insurancefrom Insurance Companies

● Insurance companies in turn Purchase Insurancefrom Reinsurance companies to transfer amount of the risk



● Why Reinsurance:

●

● Stabilization of profitability:

● Purchasing reinsurance is particularly helpful

in smoothing the peaks and valleys of a captives lossexperience, as generally the law of large numbersdoesn't apply to captive operations

● Provides large limit capacity

● Partnering with a reinsurer to accept a particularly high

risk allows the captive to provide lines of coverage andlimits that would otherwise not be feasible

●



● Catastrophe protection:

● Captives insure property-liability coverages which are

frequently concentrated in geographic or economic regions.Catastrophic exposures such as hurricanes, industrialexplosions or the like can tremendously effect lossexperience. Purchasing "cat" coverage is therefore also relatedto the stabilization function described above

● Supports high growth in premium volume

● As with any business, new endeavors are particularly risky.

As a company enters into a new line of business, geographic

region, or adds significant premium volume, it may wish to purchase some kind of reinsurance. Risk retention groups, in particular, may wish to temper the risk of accepting largeincreases in premium volume, as their writings are generallymore sensitive to market forces than pure captives



● Benefits of Reinsurance:●

● Reinsurance adds a further level of :

● Financial strength

● Stability to the financial guaranty market

● Manage their risk capacity

● By ceding risk to a reinsurer, the base of availablecapital reserves is expanded.

●



● Facultative Reinsurance:

● is a specific reinsurance covering a single

risk , the reinsurer is reinsuring oneinsured on a specific policy,Eachfacultative risk is submitted by the insurer to the reinsurer

●



● Treaty Reinsurance:

● is a method of Reinsurance requires the

insurer and Reinsurer to formulate andexecute a reinsurance contract thenReinsurer covers all policies coming within the scope of contract

●



● Types of Reinsurance Contracts

●

●

ASSUMED:● The Insurance company which accepts the risks

● Ceded:

● The insurance company which Transfers or sendsout the risk to other Insurance company

●

● Primary Insurance company can be only cededcompany

● Reinsurance can be both Assumed and Ceded



CedentCedent

PrimaryInsuranceCompany

ReinsuranceCompany

ReinsuranceCompanyTreatyTreatyTreatyTreaty

Reinsurer Reinsurer RetrocessionaireRetrocessionaire

CedingCeding AssumingAssuming CedingCeding AssumingAssuming

RetrocessionRetrocession



● Retention:

● The Amount of insurance risk which is

assumed by the Primary Insurancecompany which is not Transferred to other insurance company

●

● Retrocession:

● The amount of Reinsurance Riskswhich is assumed by Reinsurancecompany all or part of the risk istransferred to the another Reinsurer



● Retrocedent:

● The amount of Insurance risk which is

assumed by the reinsurance company istransferred to the other reinsurancecompany

● Retrocessionare:

● The Reinsurer assumes all or part of the risk which is accepted by the other Reinsurer



● Two Basic Methods of Treaty Reinsurance

● 1.Quota Share

● 2. Excess of Loss



● Quota Share:

● that requires the insurer to transfer and

Reinsurer to accept a given Percentage of every risk with in a defined category of Business

●



● Excess of loss:

● is a method where by an insurer pays the

amount of claim for each risk upto the limitdetermined in advance and Reinsurer pays the amount of the claim above thatlimit up to a specific sum



● Reinsurance Agreements:

● Proportional Agreement:

●

the primary insurer and reinsurer share theliability risk proportionately. In the case of a quotashare agreement, the primary insurer and reinsurer share in the premium and losses of a policy on a fixed

percentage basis●

Non proportional Agreement:

● also known as excess of loss agreements, say thatin the case of a default, the primary insurer is liable

for a predetermined dollar amount of loss. Any losses beyond that amount must be paid by the reinsurer upto the limit of the agreement.



● Reinstatement:

● In the event of a claim under this Contract,it is agreed that the amount of liabilityhereunder is reduced from the time of theoccurrence of the loss by the sum payableon such a claim. However, the amount soexhausted is immediately reinstated from

the time of the occurrence of the loss.



1818

Required AccountingRequired AccountingFlow ChartFlow Chart

Contract

Risk

RetroactiveProspective

No RiskRiskNo Risk

DepositAccountingUnderwritingAccounting DepositAccountingRetroactiveAccounting(a)

(a) GAAP - Underwriting Accounting



1919

Prospective Contract -A contract that covers future insurable events.

““Underwriting AccountingUnderwriting Accounting”” or Traditional Reinsurance

Accounting

•Retroactive Contract -•

• A contract that covers past insurable events.•

• ““Retroactive AccountingRetroactive Accounting”” -

• Same as old Loss Portfolio Accounting- No Reduction in Loss Reserves- Asset “Retroactive Reinsurance” - a write-in Contra Liability- Gain or Loss recognized as “Other” - a write-in line- Benefit reported as Special Surplus - restricted



2020

•If any contract does not meet Transfer of Risk analysis•““Deposit AccountingDeposit Accounting””

- No reduction in Loss Reserves- Gain not recognized until termination of contract.

introduction to re insurance

Documents