Types of Reinsurance and Reinsurance Program Design

Vocabulary terms and definitions regarding standard and non-traditional types of reinsurance, including commissions, excess of loss layers, and capital market alternatives.

Treaty Reinsurance

A transaction where terms are negotiated between a primary insurer and reinsurer to cover a specific portfolio of loss exposures.

Facultative Reinsurance

A type of reinsurance transaction used to cover specific, individual loss exposures.

Pro Rata Reinsurance

Also known as proportional reinsurance, a type where the primary insurer and reinsurer share premiums, amount of insurance, and losses in the same proportions as the risk.

Ceding Commission

A payment from the reinsurer to the primary insurer to reimburse for policy acquisition expenses incurred when underlying policies were sold.

Flat Commission

A ceding commission that is a fixed percentage of the ceded premium with no adjustment for the primary insurer’s loss experience.

Profit-sharing Commission

Also called a ‘contingent commission,’ it is negotiated and paid to the primary insurer if the reinsurer’s profits exceed a predetermined amount after deducting losses and expenses.

Sliding Scale Commission

A ceding commission that is adjusted periodically to reflect the actual profitability of the reinsurance agreement.

Quota Share Reinsurance

A type of pro rata reinsurance where the primary insurer and the reinsurer use a fixed percentage to share insurance amounts, premiums, and losses.

Variable Quota Share Treaty

A treaty that allows a primary insurer to retain a larger proportion of small loss exposures while maintaining a smaller retention on larger loss exposures.

Surplus Share Reinsurance

A pro rata reinsurance type used primarily in property insurance where the reinsurer assumes the share of insurance that exceeds a stipulated dollar amount, known as a line.

Line

A stipulated dollar amount in surplus share reinsurance that represents the primary insurer's retention for a single loss exposure.

Bordereau

A periodic report provided by the primary insurer to the reinsurer containing a history of all loss exposures reinsured under a surplus share treaty.

Line Guide

Also called a line authorization guide, it is a document providing the minimum and maximum line a primary insurer can retain on a loss exposure based on potential loss severity.

First Surplus

The surplus share treaty that applies immediately above the primary insurer’s line when multiple surplus treaties are arranged.

Excess of Loss Reinsurance

Also called non-proportional reinsurance, this type requires the reinsurer to respond to a loss only when the loss exceeds the primary insurer’s retention or attachment point.

Attachment Point

The specific dollar amount or retention level at which an excess of loss reinsurer’s obligation to indemnify begins.

Subject Premium

Also called underlying premium, it is the policy premium charged by the primary insurer that is used to calculate the excess of loss reinsurance premium.

Working Cover

An excess of loss reinsurance agreement with a low attachment point designed to enable the primary insurer to spread its expected losses over several years.

Co-participation Provision

A requirement for the primary insurer to retain a percentage of losses, such as $5\%$, that exceed the attachment point to provide financial incentive for efficient loss management.

Pro Rata in Addition

An approach where loss adjustment expenses are prorated between the primary insurer and the reinsurer based on the same percentage each is responsible for the loss.

Loss Adjustment Expense Included in the Limit

An approach in excess of loss reinsurance where loss adjustment expenses are added to the loss amount before applying the attachment point.

Per Risk Excess of Loss Reinsurance

A type of excess of loss reinsurance usually used with property insurance that applies separately to each loss occurring to each defined risk.

Catastrophe Excess of Loss Reinsurance

Reinsurance designed to protect the primary insurer from an accumulation of losses resulting from a single catastrophic event on a net basis after other recoveries.

Loss Occurrence Clause

Also called an hours clause, it specifies a time period, such as $72$ hours for hurricanes or $168$ hours for earthquakes, to aggregate losses from a single event.

Per Policy Excess of Loss Reinsurance

A type of excess of loss reinsurance used primarily with liability insurance where the limit applies to individual policies.

Per Occurrence Excess of Loss Reinsurance

Reinsurance typically used for liability where the attachment point and limit apply to total losses from a single event affecting one or more policies.

Clash Cover

A type of per occurrence excess of loss reinsurance for liability with an attachment point higher than any of the limits of the applicable underlying policies.

Pure Risk Covers

A collective term for catastrophe excess of loss and clash cover because they are expected to cover only rare events.

Extracontractual Damages

Damages awarded to an insured due to an insurer’s improper behavior or bad faith in claim handling, usually not covered unless specified in the reinsurance agreement.

Excess of Policy Limits Losses

Losses that exceed policy limits resulting from a primary insurer’s failure to settle a claim within those limits when the opportunity existed.

Aggregate Excess of Loss Reinsurance

Reinsurance covering aggregated losses that exceed the attachment point over a stated period, such as $1$ year.

Stop Loss Reinsurance

An aggregate excess of loss treaty where the attachment point is expressed as a loss ratio, such as $30\%\text{ xs }90\%\text{ loss ratio}$.

Finite Risk Reinsurance

Also known as financial reinsurance, a nontraditional type where the reinsurer’s liability is limited and anticipated investment income is an underwriting component.

Catastrophe Bond

An insurance-linked security where the obligation to pay interest or repay principal is deferred or forgiven if the issuer suffers a catastrophe loss greater than a specified amount.

Catastrophic Risk Exchange

A forum, often internet-based, where primary insurers exchange a portion of their insurance risk for another insurer's risk to diversify exposure.

Contingent Surplus Note

A surplus note designed to allow a primary insurer to immediately obtain funds at a pre-agreed rate of interest by issuing notes at its option.

Industry Loss Warranty

An insurance-linked security (ILW) where coverage is triggered if industry-wide losses from a specific catastrophic event exceed a predetermined threshold.

Catastrophe Option

An agreement giving the primary insurer the right to a cash payment from investors if a specified catastrophe loss index reaches a strike price.

Line of Credit

An arrangement where a bank provides a loan to a primary insurer in the event of a loss, for which the insurer pays a commitment fee.

Sidecar

A limited-existence special purpose vehicle (SPV) that provides a primary insurer additional capacity to write catastrophe business through a quota share agreement with private investors.