| When an insurance company insures itself it is | | | | In another way, reinsurance is classified as |
| called as reinsurance, where by it shares the risk | | | | proportional and non-proportional reinsurances. |
| of loss with another company. Insurance | | | | Proportional Reinsurances: The two companies |
| companies need reinsurance, when they face the | | | | share the premium as well as risk. The reinsurer |
| danger of having to pay a multitude of claims at | | | | usually pays a ceding commission. |
| the same time and hence have no option but to | | | | Pro-Rata Reinsurance: It is a classification based |
| face bankruptcy, where as if they have reinsured | | | | on the way the two companies share the risk. |
| they are protected to a certain extent. Event like | | | | The cedent and the reinsurer share a pre decided |
| the September 11 attack of the twin towers | | | | percentage of the premium and losses. It is used |
| have caused the closure of several small | | | | widely as it provides surplus protection. There are |
| reinsurance agencies, hence the significance of | | | | two types of pro-rata reinsurance, quota share |
| reinsurance for an insurance company is | | | | and surplus share. |
| tremendous. | | | | Quota Share Pro-Rata Reinsurance: The primary |
| Types of Reinsurance: | | | | insurer cedes a fixed percentage of premiums |
| There are two kinds of reinsurances, treaty | | | | and loses for every risk accepted. |
| reinsurance and facultative reinsurance. | | | | Surplus Share Pro-Rata Reinsurance: It is different |
| Treaty Reinsurance: This kind of reinsurance | | | | in that not every risk is ceded but only those that |
| requires that the reinsurer will assume part or all | | | | exceed certain predetermined amounts. |
| of a ceding company's responsibility for certain | | | | Non-Proportional Reinsurance: As the name |
| sections or classes of business in accordance with | | | | suggests it is not proportional and the reinsurer |
| the terms of the policy. It is an obligatory | | | | only responds if the loss suffered by the insurer |
| contract as the ceding company has to cede the | | | | exceeds a certain amount. |
| business and the reinsurer is obliged to assume | | | | Excess of Loss: It covers a single risk or a certain |
| the business as per the treaty. It is the preferred | | | | type of business. Catastrophe reinsurance is a |
| type of reinsurance when groups of homogenous | | | | type of excess of loss reinsurance. It provides |
| risks are considered. | | | | the captive with a great deal of flexibility. |
| Facultative Reinsurance: This kind of reinsurance is | | | | Stop Loss Reinsurance: It covers the whole |
| used while considering a particular underlying risk | | | | account and is also known as excessive loss ratio |
| of an individual contract. It is the reinsurance of all | | | | reinsurance. |
| or part of a single policy after the terms and | | | | These are the various types of reinsurances. |
| conditions have been negotiated. It reduces the | | | | There are firms that offer their services as well |
| ceding company's exposure to risk from an | | | | as their products to help new business start up |
| individual policy. It is non- obligatory. | | | | flourish and succeed. |