how reinsurance works
reinsurance allows insurers to remain solvent by recovering some or all amounts paid out to claimants reinsurance reduces the net liability on individual risks and catastrophe protection from large or multiple losses the practice also provides ceding companies those that seek reinsurance the chance to increase their underwriting capabilities in number and size of risks ceding companies are insurance companies that pass their risk on to another insurer benefits of reinsuranceby covering the insurer against accumulated liabilities reinsurance gives the insurer more security for its equity and solvency by increasing its ability to withstand the financial burden when unusual major events occur insurers are legally required to maintain sufficient reserves to pay all potential claims from issued policies 2through reinsurance insurers may underwrite policies covering a larger quantity or volume of risk without excessively raising administrative costs to cover their solvency margins in addition reinsurance makes substantial liquid assets available to insurers in the event of exceptional losses 3types of reinsurancefacultative coverage protects an insurer for an individual or a specified risk or contract if several risks or contracts need reinsurance they are renegotiated separately the reinsurer holds all rights for accepting or denying a facultative reinsurance proposal 4a reinsurance treaty is for a set period rather than on a per risk or contract basis the reinsurer covers all or part of the risks that the insurer may incur under proportional reinsurance the reinsurer receives a prorated share of all policy premiums sold by the insurer for a claim the reinsurer bears a portion of the losses based on a pre negotiated percentage the reinsurer also reimburses the insurer for processing business acquisition and writing costs 5with non proportional reinsurance the reinsurer is liable if the insurer s losses exceed a specified amount known as the priority or retention limit in the case of non proportional reinsurance the reinsurer doesn t have a proportional share in the insurer s premiums and losses the priority or retention limit is based either on one type of risk or an entire risk category excess of loss reinsurance is a type of non proportional coverage in which the reinsurer covers the losses exceeding the insurer s retained limit or surplus share treaty amount this contract is typically applied to catastrophic events and covers the insurer either on a per occurrence basis or for the cumulative losses within a set period 6under risk attaching reinsurance all claims established during the effective period are covered regardless of whether the losses occurred outside the coverage period no coverage is provided for claims originating outside the coverage period even if the losses occurred while the contract was in effect 7