Reinsuring is the act of purchasing a reinsurance agreement.
Reinsurance is purchased by an insurance company who wishes to
transfer part of the risk of loss from an issued policy or group of
policies to another insurance carrier. This is done when the limit
of insurance for a particular policy would exceed the capacity of
an insurance carrier or a carrier needs reinsurance to increase the
policy holder surplus required to maintain a sound financial
position. Their are two types of reinsurance, treaty reinsurance
and facultative reinsurance. Treaty reinsurance is arranged usually
in advance, for a group of policies meeting certain criteria. For
example, a treaty reinsurance policy may cover $250,000 of property
losses excess of $250,000 for all commercial building properties in
a given state. This is called excess of loss treaty reinsurance.
This would be used to address capacity issues that occur
frequently. Another type of treaty reinsurance is pro-rata
reinsurance or share reinsurance. In pro-rata reinsurance, the
reinsurer agrees to pay a percentage of all losses on the agreed
upon policies. For example, a pro-rata treaty reinsurance policy
may pay 50% of all losses of a group of policies. The premium for
this type of reinsurance would be 50% of the earned premium for
each of the policies covered minus a deduction for policy expense
(underwriting and compensation to the agent). This type of treaty
reinsurance is used to address a policyholder surplus need of the
ceding insurer. Facultative reinsurance is issued for one policy,
not a group of policies, and is usually used to address large line
capacity, especially in property coverage. Facultative is usually
written on an excess of loss basis. For example, an insurance
company may have secured treaty reinsurance to write properties of
a certain type up to $150 million loss limit, but the insured is
requesting $250 million. To write the insurance policy, the
insurance company must secure facultative reinsurance in the amount
of $100 million excess $150 million. This may be abrivated $100
million xs $150 million. Mark Walters, ARM AAI West Insurance Group
mwalters@westagy.com
