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.
