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Reinsurance
Definition of Reinsurance
Reinsurance
refers to a situation where
insurance
companies protect themselves against losses they may incur in the course of
writing insurance business.
A number of
different types of reinsurance are available. The two main types are
proportional reinsurance and non-proportional reinsurance.
Two Types of
Reinsurance:
1- Proportional :
Proportional
reinsurance (mostly known as quota share and
surplus reinsurance) is where the reinsurer takes a stated %
share of each policy the insurer writes and then shares in the premiums and
losses in that same proportion.
2 - Non-proportional (Excess of
Loss):
Non-Proportional
Reinsurance (or Excess of Loss) only responds if the loss suffered by the
insurer exceeds a certain amount (retention).
Remark:
When reinsurance is provided for an individual risk which the primary insurer
either cannot or does not want to bear in full itself, Facultative
reinsurance is used only for few risks requiring reinsurance cover or for
those which do not fit into a treaty reinsurance scheme. Typical cases are:
peaks in a insurance portfolio, target risks in the market or difficult and
unusual risks.
But treaty
is used for cases where the portfolio of risks is large enough to ensure savings
in administrative work. Further, the potential reinsurance portfolio should be
adequately balanced so that an individual risk cannot substantially affect the
overall result.
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