Kinds of Reinsurance Contracts

Reinsurance contracts can have a significant impact on a insurance entities financials.  Often times, unknown, until the Aggregate contract is applied.

Financials and spreadsheets can be designed to provide you the year-long knowledge of how your reinsurance contracts are impacting your financials.

Realize, in practice - no two contracts are exactly alike.

Pro rata reinsurance:
Predetermined percentage of risk/claim for a predetermine percentage of premium.
Typically, no regard for frequency or severity of claim.
Note:  "Quota Share" or "Surplus Share" reinsurance can affect Pro Rate reinsurance.

Quota share reinsurance:
This is a type of pro rata reinsurance.  The Premium ceded is the same percentage as the risks ceded. 

E.G. a 50% Quota-share treaty results in 50% of premium ceded out, and 50% of claims back in.
Note: Ceded premiums are typically "netted" against ceding commissions earned.
Note: Typical for new entities or new lines of business.

Surplus share reinsurance:
This is a type of pro rate reinsurance.  Generally, only for risks that exceeds a certain coverage amount.  Premiums and losses are shared on a pro-rata basis, in proportion to the amount of risk insured/reinsured by each.

Excess reinsurance:
An insurer limits its liability to all or a portion of the amount in excess of a "retention amount" or a "deductible"  Therefore, the excess over the "retention" is ceded to the reinsurance company.  Premium/claims is typically not proportional.
Note:  Excess reinsurance takes three basic forms - Per Risk, Per Occurrence, Aggregate.

Excess per risk:
Insurer pays all claims up to the retention limit for each covered risk; then excess amount is reimbursed by the reinsurance company.

Excess per occurrence:
Often referred to as CAT or Catastrophe Reinsurance.
Retention limit is set to time and amount.  Example: Storm/Tornado/hail/wind = occurs for hours, and does wide scale damage.  Insurer pays for all claims in a certain period of time (72 hours) and up to a retention on that period of time ($500K).  Reinsurance company then reimburses insurer for all claims over the $500K that occurred in the specific 72 hour period.

Aggregate excess:
Generally the "strike-point" for recovery, under an aggregate contract, is a "loss ratio".  An insurer pays all claims, including other contract retentions, and compares those claims incurred to the net premium earned.  Once a threshold is met (strike-point), then reinsurance is received to "stop the loss" for insurer.  E.G.  75% loss threshold would result in reinsurance receipts for excess loss ratio over 75%.
Note: often referred to as a "stop loss contract".

Storm season is upon us...Tornadoes will happen - do you know the impact of your CAT contracts on your financials?

If you need assistance with your reinsurance contracts, please just ask.