There are two main types of contractual reinsurance, proportional and non-proportional, listed below. In proportional reinsurance, the reinsurer`s share of risk is defined for each individual policy, while in non-proportional reinsurance, the reinsurer`s liability is based on the transferor`s aggregate losses. Over the past 30 years, there has been a strong shift in property and casualty insurance from proportional to non-proportional reinsurance. Almost all insurance companies have a reinsurance program. The ultimate goal of this program is to reduce their exposure to losses by transferring some of the risk of loss to a reinsurer or group of reinsurers. Regulation: As an industry, reinsurance is less regulated than insurance for individual consumers, as reinsurance buyers, primarily the major companies that sell auto, home and commercial insurance, are seen as demanding buyers. However, in the early 1980s, public insurance officials were increasingly concerned about the reliability of reinsurance contracts – the reinsurer`s ability to meet its contractual obligations – and the use of these contracts by a major company. Following the annual meeting of the National Association of Insurance Commissioners (NAIC) in Philadelphia in June 1982, an advisory committee was formed to review the regulation of reinsurance transactions and the parties to such transactions. In 1984, a model law on credit was adopted. In the case of non-proportional reinsurance, the reinsurer pays only if the total number of losses incurred by the insurer during a given period exceeds a declared amount, called a “deductible” or “priority”. For example, the insurer may be willing to accept a total loss of up to $1 million and acquire a $4 million reinsurance layer that goes beyond that $1 million. Then, if a loss of $3 million were to occur, the insurer would bear $1 million of the loss and claim $2 million from its reinsurer. In this example, the insurer also retains any excess loss of more than $5 million, unless it has acquired another excess layer of reinsurance.

Due to its specificity, optional reinsurance requires the use of considerable human and technical resources for the underwriting activity. A basis on which reinsurance is provided for policy claims that begin during the period to which reinsurance relates. The insurer knows that coverage exists throughout the insurance period, even if claims are discovered or claimed later. Global reinsurer Munich Re describes the term “pro-rated” as follows: “A term that describes all forms of co-ownership and excess share reinsurance in which the reinsurer bears the same share of the premium and losses of the transferring company. Prorated reinsurance is also called “proportional reinsurance”. In addition to the proportional distribution of premiums and losses, the reinsurer usually pays an assignment fee to the transferring company to reimburse the costs associated with issuing the underlying policy. `Primary insurers and reinsurers shall negotiate reinsurance contracts (insurance for the insurance undertaking) using optional and/or contractual arrangements; as a rule, these are used in combination. Each of these agreements has a specific purpose as follows: in proportional reinsurance, one or more reinsurers take a certain percentage share of each policy issued by an insurer (“underwritten”).

The reinsurer then receives the specified percentage of premiums and pays the specified percentage of claims. In addition, the reinsurer grants the insurer a “transferor`s commission” to cover the costs incurred by the transferring insurer (mainly acquisition and administration, as well as the expected profit that the transferor will give up). Insurance undertakings wishing to transfer the risk to a reinsurer may find that optional reinsurance contracts are more expensive than contractual reinsurance. Indeed, contractual reinsurance covers a “risk book”. This is an indicator that the relationship between the assignor and the reinsurer is likely to become a long-term relationship (as opposed to that if the reinsurer wants to cover only one risk in a one-time transaction). While rising costs are a burden, an optional reinsurance arrangement may allow the transferor to insure certain risks that they may not otherwise be able to assume. The reinsurer`s liability generally covers the entire life of the initial insurance once it is terminated. However, the question arises as to when one of the parties can terminate reinsurance for new future business. Reinsurance contracts can be concluded on a “continuous” or “forward” basis. A perpetual contract does not have a predetermined end date, but in general, either party can terminate 90 days in advance or modify the contract for new business.

A futures contract has a built-in expiration date. It is common for insurers and reinsurers to have long-term relationships that span many years. Reinsurance contracts are generally longer documents than optional certificates and contain many of their own terms that are different from the terms of directly insured insurance policies. But even most reinsurance contracts are relatively short documents, given the number and variety of risks and areas of activity that reinsure the contracts and dollars associated with transactions. They rely heavily on industry practice. There are no “standard” reinsurance contracts. However, many reinsurance contracts contain commonly used provisions and provisions that are imbued with important industry commonalities and practices. [2] There are different types of contractual agreements. The most common are so-called proportional contracts, in which a percentage of the transferor`s initial policies are insured up to a limit. Policies beyond the limit are not covered by the reinsurance contract. Many reinsurance investments are not placed with a single reinsurer, but are spread across a number of reinsurers.

For example, an excess of $30,000,000 in the amount of $20,000,000 can be shared by 30 or more reinsurers. The reinsurer who determines the terms (premium and contractual terms) of the reinsurance contract is called the lead reinsurer; the other companies concluding the contract are referred to as the following reinsurers. Alternatively, a reinsurer can take over the entire reinsurance and pass it on to other companies (pass it on in another reinsurance contract). In a proportional agreement, which most often applies to real estate coverage, the reinsurer and the main company share both the policyholder`s premium and potential losses. Sometimes insurance companies want to offer insurance in jurisdictions where they are not licensed or where they feel that local regulations are too onerous: for example, an insurer would like to offer an insurance program to a multinational to cover property and liability risks in many countries around the world. In such situations, the insurance company may find a local insurance company licensed in the country in question, arrange for the local insurer to issue an insurance policy covering the risks in that country, and enter into a reinsurance contract with the local insurer to transfer the risks to itself. In the event of a claim, the policyholder would use the local insurer under the local insurance policy, the local insurer would pay the claim and demand reimbursement under the reinsurance contract. Such an arrangement is called “fronting”. Fronting is also sometimes used when an insurance buyer requires its insurers to have a certain financial strength rating and the potential insurer does not meet this requirement: the potential insurer may be able to convince another insurer with the required credit rating to provide coverage to the insurance buyer and take out reinsurance in relation to the risk.

An insurer acting as a “front-end insurer” receives a prepayment fee for this service to cover the reinsurer`s administration and any default. The front-end insurer takes a risk in such transactions because it is obliged to pay its insurance claims even if the reinsurer becomes insolvent and does not reimburse the claims. Optional reinsurance is usually the easiest way for an insurer to obtain reinsurance coverage. These guidelines are also the easiest way to adapt to specific circumstances. Prorated reinsurance is usually quite easy to manage and offers good protection against frequency and severity. Property and casualty reinsurance can take three forms: “Pro Risk XL” (Working XL), “Per Event or Per Event XL” (Catastrophe or Cat XL) and “Aggregate XL”. In most contractual agreements, after determining the terms of the contract, including the risk categories covered, all policies that fall under these conditions – in many cases, new and existing businesses – are usually covered automatically until the agreement is terminated. Types of reinsurance: Reinsurance can be divided into two basic categories: contractual and optional. Contracts are agreements that cover large groups of policies, such as.B.

the entire automotive business of a major insurer. The option covers specific individual risks, usually of high quality or dangerous, such as . B a hospital, which would not be accepted under a contract. All insurers file financial statements with the regulatory bodies that monitor their financial health. Financial health implies not assuming more risks or liabilities for future claims than is desirable given the amount of capital available to support, i.e. to pay claims. The net present value of reinsurance with a transferring company (the purchaser of reinsurance) for regulatory purposes is the recognition of a reduction in its liabilities in the financial statements of the transferring company compared to two accounts: its non-contributory premium reserve and its claims reserve […].