BCP Ch 8

Introduction to Reinsurance

• Definition of Reinsurance:
  • An extension of insurance that involves transferring risks from the primary insurer (cedant or ceding company) to a reinsurer.
  • Commonly referred to as "insurance for insurance companies."

Key Features

• Reinsurance acts as a risk transfer mechanism, helping insurers manage their own risks and claims.
• The main purpose is to protect insurers from significant or catastrophic losses.

Process Overview

• The reinsurer accepts risks ceded by direct insurers, and intermediaries like reinsurance brokers may sometimes facilitate this process.
• Important Note: The original insured does not have a direct relationship with the reinsurer; the direct insurer remains liable for all claims.

Objectives of Reinsurance

• Insurers pursue reinsurance for various reasons to manage and mitigate their risks effectively.

Reasons for Buying Reinsurance:

A. Security & Confidence

• Reduces uncertainty of losses, providing peace of mind to direct insurers.

B. Stability

• Smoothens fluctuations in loss experience, which enhances financial stability and performance for insurers.

C. Capacity

• Increases the capacity of insurers to write polices without exceeding their financial limits by ceding some risk.

D. Catastrophe Protection

• Shields insurers from the financial strain associated with a large volume of claims following catastrophic events.

Advisory Role

• Reinsurers often offer advisory services to help insurers:
  • Assess reinsurance needs.
  • Plan capital requirements and solvency.
  • Provide technical training and support.

Methods of Reinsurance

• Two primary methods exist for reinsurance: Facultative Reinsurance and Treaty Reinsurance.

A. Facultative Reinsurance

1. Characteristics:

   • Individual risks or policies are reinsures on a case-by-case basis.
   • The ceding insurer has full discretion over which risks to cede.

2. Process:

   • Time-consuming and costly due to the individual nature of placements.
   • Suitable for complex or higher-risk situations.

3. Example:

   • Insurer X cedes 50% of a highly risky asset policy to multiple reinsurers (Reinsurer 1: 25%, Reinsurer 2: 15%, Reinsurer 3: 10%).

B. Treaty Reinsurance

1. Characteristics:

   • An agreement that requires reinsurers to automatically accept all risks falling within predetermined terms.
   • Less administratively burdensome than facultative reinsurance.

2. Types:

   • Proportional Treaty Reinsurance: Insurer cedes a percentage of premiums and claims.
   • Non-Proportional Treaty Reinsurance: Reinsurers cover losses above a designated threshold (deductible).

3. Example of Proportional Treaty:

   • Insurer X enters a treaty with Reinsurer Y to cede 30% of all motor insurance premiums.

Non-Proportional Reinsurance

1. Concept:

   • Insurers retain a predetermined amount (excess) before the reinsurer is liable for claims above that threshold.

2. Example:

   • Insurer X purchases "Excess of Loss" cover; claims above S$1 Million are handled by reinsurers.

3. Claims Example:

   • For claims of S$3 Million, Insurer X pays S$1 Million, while reinsurer covers S$2 Million.

Co-Insurance

• Refers to arrangements where risk is shared among multiple insurers under one policy.

Key Features:

1. Single Policy:

   • One policy issued with a nominated leading insurer managing negotiations and claims.

2. Roles:

   • Leading insurer handles surveys, premium calculations, and policy issuance.
   • All co-insurers split premiums and liabilities in accordance with their share of the risk.

3. Claims Settlement:

   • Each co-insurer pays its agreed percentage upon a claim, with direct responsibility to the insured unlike reinsurance arrangements.

Comparison of Reinsurance & Co-Insurance

Differences:

• Reinsurance:

  • Involves risks transferred from a primary insurer to reinsurers.
  • Only direct insurers and reinsurers interact, not the insured.

• Co-Insurance:

  • Involves direct interaction between the insured and multiple insurers.
  • Liability for claims is shared, proportioned based on co-insurers' agreed shares, unlike in reinsurance where only the primary insurer is liable to the insured.

Table of Key Differences

• Provides clarity on how each method operates, including the relationships among parties involved and the implications of insolvency.