Advantages And Disadvantages Of Surplus Treaty Reinsurance

Arising out of example 3 of Surplus Treaty Reinsurance, if no facultative arrangement can be made, then sometimes an attempt may be made by the ceding company to get the entire money absolved within the treaty arrangement, particularly where there is no upper limit stipulated. The ceding company may raise retention to CAD. 15,00,000 instead of CAD. 10,00,000 permissible by its own fund & resources. Then the arrangement may be as follows:

ABC’s Retention                          : CAD.   15,00,000

Treaty consumes (9 x 15 lac): CAD.1,35,00,000

CAD. 1,50,00,000

The visitors must realize here that the principle of reinsurance is being violated by such an attempt. On the one hand the excess retention of CAD. 5,00,000 will create an additional charge on the company’s fund for which there is no provision and which attempt is bound to disturb the company’s financial stability and profitability, and on the other is sure to create an adverse impact on the reinsurer’s interest, in addition to the creation of a mistrust which is totally undesirable in this trusted profession.

Advantages Of Surplus Treaty Reinsurance:

Because of the advantages involved, this is the most accepted form of reinsurance now-a-days. Whilst all the advantages of facultative and quota share system are there, the disadvantages of these two types are missing. Important advantages of surplus treaty reinsurance are :

a) Cover is automatic as opposed to facultative system.

b) It is less expensive in comparison to facultative and little procedural formalities are involved.

c) Unlike quota system, the ceding company can retain whatever it likes and the balance only is ceded. Unnecessary cession of business and premium is not envisaged.

d) This method is of particular advantage to established companies who are growing concerns and who have scope for gradually increasing their retention with the increase in financial strength.

Disadvantages Of Surplus Treaty Reinsurance:

Disadvantages are very little and some of the minor ones are :

a) For big liability insurances or for protection against losses of catastrophe nature, other methods like Excess of Loss or Stop Loss arrangements are better suited.

b) Re-insurers cannot usually apply underwriting judgment for each and every individual case, even though they might have entries into ceding company’s account at periodical intervals.

c) This method is not suitable for new insurance companies.

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