Fidelity and Surety Catastrophe Insurance

Mechanism used by a fidelity and surety insurance company to spread its liability through Reinsurance by issuing a surplus treaty as a first layer of coverage, thereby enabling a cedent to limit its liability on the business written, while at the same time utilizing the flexibility that the surplus method offers. The reinsurance catastrophe cover provides a second layer of coverage. Reinsurance covers are used by the insurance company to:

1. Avoid accumulation of liability on individual principles. Warehouse bonds are an example of such accumulations, because they are required in great number and they result in large aggregate amounts.

2. Achieve a balance among the various types of bonds that the insurer assumes.

3. Reduce violent fluctuations in experiencing high loss ratios on many classes of bonds.