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