As leaders in the insurtech space, it’s crucial to understand the underpinnings of the insurance industry. One cornerstone is reinsurance, which serves as a crucial risk management tool for insurers worldwide.
In simple terms, reinsurance is when an insurance company gets a portion of its policies’ risks insured by another entity. This strategy spreads the risk, offers protection against substantial claims, and boosts underwriting capacity.
Today, we’ll explore the primary types of reinsurance that dominate the market.
1. Treaty Reinsurance: A standing agreement where the reinsurer agrees to cover the specified portion of the original insurer’s risk over a defined period and covers multiple policies; for example, if an insurer asked a reinsurer to cover their entire book of marine business. Treaty reinsurance can be further divided into:
- Proportional Treaty: Here, the reinsurer and insurer share premiums and claims in a pre-agreed ratio. There are two main types in this category:
- Quota Share: The reinsurer takes a fixed percentage of every risk.
- Surplus Share: The reinsurer covers the amount of risk exceeding the insurer’s retention limit or the maximum amount of insurance that an insurance company will retain at its own risk.
- Non-Proportional Treaty: The reinsurer pays out only when claims exceed a predetermined amount.
- Excess of Loss: The reinsurer covers claims above a certain limit; this is often used for catastrophic events.
2. Facultative Reinsurance: Unlike treaty reinsurance, which covers multiple policies, facultative reinsurance is negotiated separately for each insurance policy. It provides flexibility and is typically sought for specific, often large or unusual risks not covered in treaty reinsurance, like a rare work of art
3. Retrocession: This is reinsurance for reinsurers. Here, a reinsurer transfers a portion of its risks to another reinsurer. This layered approach ensures a balanced distribution of risk across the market.
4. Catastrophe Reinsurance: This type protects an insurer from multiple claims arising from catastrophic events like earthquakes or floods. It’s usually structured as an “excess of loss” agreement.
5. Risk-Attaching Reinsurance: This covers all policies the original insurer writes during the contract’s effective period. It ensures that any risk arising within the contract period is covered, regardless of when the actual loss occurs.
6. Loss-Occurring Reinsurance: Unlike risk-attaching, this covers losses occurring during the contract period, regardless of when the policy was written.
7. Aggregate Excess of Loss Reinsurance: This is tailored for multiple claims in a set period, offering protection once claims exceed a set amount in the aggregate.
8. Stop Loss Reinsurance: This safeguards against an insurer’s overall loss ratio exceeding a predefined percentage.
Reinsurance is a complex but indispensable tool, offering stability and confidence to the global insurance industry. By understanding the various types of reinsurance, insurers can craft their risk management strategies more effectively. At Accelerant, we are always keen to share knowledge and insights, bridging the gap between traditional insurance practices and modern insurtech innovations.
Remember, in an ever-evolving landscape, the one constant is change. But with change comes opportunities, and reinsurance is one such avenue offering the insurance industry both security and growth potential. Stay tuned for more insights from the heart of the insurtech world!