What Are The Different Forms Of Reinsurance

We have already discussed on Different Types Of Reinsurance Arrangements prevailing in Insurance World. The discussions will now be made as to the Different Forms Of Reinsurance that usually take place. Basically there are two forms of reinsurance irrespective of the type of reinsurance we have discussed so far. These are Participating and Non-participative reinsurance. They are discussed shortly in the below section of this article.

Different Forms Of Reinsurance

1) Participating Or Prorata Reinsurance : Where the proportion of amounts payable by the insurer and the reinsurers in respect of a loss is determined and agreed beforehand, i.e., before a loss. Here the premium received by the insurer is also distributed in between himself and the reinsurers in the same proportion. Examples are (i) facultative, (ii) quota share, (iii) surplus or pool.

Quota share type of treaty requires the direct insurer to cede a predetermined proportion of all its business accepted in a certain class to the reinsurer(s), and the reinsurers, also agrees to accept that proportion in return for a corresponding proportion of the premium.

In Surplus Treaty, the direct insurer agrees to reinsure only the surplus amount, after its retention, and the reinsurers agree to accept such cessions, usually up to a predetermined upper limit. Surplus treaties are usually arranged in lines, each line being equal to insurer’s own retention.

In Facultative Reinsurance, participation by reinsurer in a risk is not pre-arranged through a standing treaty contract. Reinsurance has to be arranged by the insurer after getting a proposal of insurance from the company would be insured and preferably before giving any cover to the proposer. Normally, after getting a proposal for insurance, the insurer decides as to how much he can retain on that particular risk.

2) Non-Proportional Reinsurance : Where the reinsurance is on different terms and the reinsurers do not stand to be proportionately liable for a loss. Therefore, premium received by the insurer is also not required to be proportionately distributed to the reinsurers. Examples are, excess of loss treaty, stop loss treaty etc.

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