What Are The Different Types Of Reinsurance Arrangements

It is probable that the reinsurer may have sufficient amounts ceded from a number of different sources and unfortunately the cession may relate to the same risk. To relieve itself from this undesirable accumulation, the reinsurer would itself have to resort to reinsurance. There are Different Types Of Reinsurance Arrangements available in reinsurance companies.

Different Types Of Reinsurance Arrangements in Insurance World:

Broadly, there are two main Types Of Reinsurance Arrangements. These are :

  1. Facultative Reinsurance
  2. Treaty Reinsurance

1. Facultative Reinsurance: This is the original form of 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. If there remains a balance after retention, he goes to facultative market with the request to make reinsurers interested in the risk. This request is usually made through a slip detailing the particulars of the risk. If a reinsurer is interested in the risk then he initials the slip clearly indicating the percentage or amount of risk he is willing to subscribe in this way the insurer goes from re-insurer to reinsurer unless 100% of the risk is absolved.

2. Treaty Reinsurance: A reinsurance treaty is merely an agreement in between two or more insurance companies whereby one (Direct insurer) agrees to cede and the other or others ( reinsurer) agree to accept reinsurance business as per provisions specified in the treaty. More specifically, it is a pre-arranged agreement whereby the direct insurer cedes and the reinsurers) accepts cessions within a pre-determined limit.

Treaty reinsurance is of various types and some of the important Treaty Reinsurance are described here. Four types of treaty reinsurance are:

  • Quota Share Or Proportional
  • Surplus Excess Of Loss
  • Excess Of Loss Ratio ( Or Stop Loss )
  • Pools
  • Non-proportional

Discussions are now made about these two broad divisions, along with their sub-divisions, indicating what these are and how these works.

(a) Quota Share Or Proportional: This 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.

(b) Surplus Treaty : The important feature here is this that 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.

(c) Excess Of Loss Ratio: This type of arrangement is also known as STOP LOSS reinsurance and is a bit different from the Excess of Loss arrangement, even though both basically base on loss rather than sum-insured. Here, a relationship is usually drawn in between the gross premium and the gross claim over a year in a particular class of business. The ceding company decides a gross loss ratio up to which it can sustain.

(d) Pools : Pools are basically treaties, either quota share or surplus, in the sense that under these arrangements various member countries or member companies join their hands together beforehand for sharing each other’s premium as well as claims.

e) 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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