Introduction:
Reinsurance typically involves large exposure to loss . When we referred to insurance as a risk transfer mechanical, we simply saying that the insured is faced with risks of loss but chose to pass the risk over to the insurer. The insurer can also seek insurance protection by insuring the risk again this is what is called reinsurance.
Some reinsurance company that are available globally may include, for example Africa reinsurance, Swiss reinsurance company, American reinsurance company etc. For the porpose of global catastrophe. Reinsurance contract or programs is meant to cut off the peak risks and limit the exposure on risk underwritten by the company beyoud it's capacity.
What is reinsurance;
The German law of commercial defined reinsurance as the insurance of the risk assume by the insurer. This means that an original insurer arrange for reinsurance with a reinsurer who accepts a part of the risk of loss. Reinsurance can also be seen as a transaction in which an insurer agrees , for a premium, to indeminfy another insurer against all part of the loss or damage that the insurer may sustain or get under it's policy of insurer. The company or firm purchasing the insurance is known as the ceding insurer and the company selling insurance is known as the reinsurer.
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Objective of reinsurance;
The objective of the reinsurance can be seen as follows;
Financial security:
The buyer of insurance (insured) insure property to get the financial protection in the event of loss or damage to the property. The insurance company or firm seeks the same type of security, and peace of mind ,by reinsuring part of the risk underwritten by them basically for financial security in the business.
Stability:
Fluctaution in the cost of claims from time to time can be avoided through reinsurance by using professional experience to draw in a fair conclusions as to the likeli hood and cost of claims thereby stabilizing loss levels and uncertainty.
Capacity:
By purchasing reinsurance, the insurer can increase the capacity it has to accept business. For example for example acting alone one insurer can accept business risks of up to let say 2,000,000 dollars and with reinsurance backing accepts a risk of up to 20,000,000 dollars with the knowledge that he can pass of the extra 18,000,000 to it's reinsurer . This capacity to accept large risk add prestige to the image of the insurer in the eyes of the public in the business cycle.
Confidence:
Reinsurance reinforce the confirmation of confidence among insurers knowing that reinsurance protection is a fall back mechanism for their business in case of loss and damages of unforseen circumstances.
Catastrophe:
The insurer is not immune to the possiblity of a complete loss or damage. This could cause financial problems which the insurer would want to avoid. Some this probkems can be best solved by transferring much of the risk to the reinsurer.
Spreading risk:
The insurer through reinsurance spread thier business loss and damages by ensuring that the total loss and damages is not concentrated on one insurer alone. In the manner , the direct office could spread the potential impact of future losses and damages.
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Type of reinsurance:
The method applied for arranging reinsurance transactions may include the following;
1. Treaty reinsurance;
This type of method is used to reinsure a group of the insurers policies . The arrangements is for a given period of time and are subject to restrictions. Advanced arrangements that is subject to to periodical reviews and checks is part of the supposed agreements . With treaty reinsurance, automatic protection is assured. This is because, the arrangements makes it obligated and a most for the treaty as well as allowing the ceding company to cede risks in accordance with the terms of the treaty in the agreement.
Two types of treaty in reinsurance are as follows;
1. Proportional treaty
2. Non proportional treaty
Proportional reinsurance treaty;
A proportional reinsurance treaty is an arrangement that is binding the ceding an the reinsurer to accept a pre agreements share of the treaty . There fore the reinsurer shares proportional premium earned and are responsible, for the treaty . Proportional reinsurance treaty is subdivied into quota share and surplus treaties.
Quota share treaty;
Quota share reinsurance treaty is basically the ceding office or firm cannot retain all the risks no matter how small the sum of amount insured. Hence , such proportion of every risk is reinsured.
The quota share reinsurance is basically used when ;
1. The company has not been long in a particular market and it's underwritten expect is not known and yet it requires substantial reinsurance protection against losses and damages in business.
2. Where by the surplus treaty claims experience has been very poor and insufficient.
3. It is used as an opportunity to earn and get higher commission rates than on the surplus treaty.
Surplus treaty:
This is a pre arrangements cover and here, the ceding office can manuver within it's limit of retention. If the sum insured is less than the retention limit of the ceding office,it can retain everything without necessarily reinsuring. With this type of treaty , it is possible for the ceding office or business firm to accept poorer risk and keep a low retention and or to keep high retention of good risks. For example where the direct firms retention was 40,000 and it could therefore accept 240,000 of any risk while the remaining 40,000 is for it's in account. This can be shared as follows;
Capacity - 12 lines
Direct office= 40,000 - 2 lines
Reinsurer = 200,000 - 10 lines
Non proportional reinsurance treaty:
This type of treaty where by the insurer agrees to pay the ceding firm or company all the losses and damages that exceed a certain company. This limit may be Express either in monetary or in percentage terms.
The agreement, unlike proportional reinsurance treaty is not concerned with any proportion of the sum of amount insured on any risk or with the proportional sharing of claim between the ceding firm or company and the reinsurer. The reinsurer is involved only when the original loss has exceeded the insure insurers retention.
The two non proportional treaties are as follows
1. Excess of loss and
2. Excess of loss ratio (stop ratio).
Reinsurance pools:
Reinsurance pools are sometimes arrange for exceptional hazardous risks. The member firm and companies may not retain any of the risk accepted in the direct market but retain and reinsure 100% into the pool. Each member firm then accepts a prearrangement percentage of the business in the pool. Sharing in the losses and profit in these proportions.
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