1. Reinsurance Introduction Types of Reinsurance Types of Reinsurers
Uses of Reinsurance
New Developments

2. Introduction to Reinsurance
What is reinsurance?
Insurance for insurance companies
How reinsurance is used
Capacity Stability
Catastrophe protection Financial strength
Entry and exit Accounting
Economic significance
Relationship with primary insurers and original policyholders
Problems and limitations

3. Insurance / Reinsurance Parallels
Insurer
(policy limit)
Reinsurer
(policy limit)
Reinsurer
“assumes”
responsibility
for part of loss
Policyholder
pays premium
to insurer
Insurer
indemnifies
against loss
Insurer “cedes”
part of premium
to reinsurer
Policyholder
(pays deductible)
Insurer
(pays “retention”)

4. Types of Reinsurance Facultative versus treaty
Facultative - specific risks
Treaty - book of policies
Proportional versus non-proportional (excess)
Proportional
Quota share - all policies on same basis
Surplus share - basis varies by policy limits
Non-proportional
Excess of loss

5. Types of Reinsurance (cont.)
Forms of proportional reinsurance
Quota share: reinsurer pays a fixed percentage of each policy’s losses, and receives a fixed percentage of the original premium
Surplus share: reinsurer’s share varies by policy (according to policy limit)

6. Types of Reinsurance (cont.)
Forms of excess-of-loss reinsurance
Per risk: covers individual losses from each policy or risk (common for property coverages)
Per occurrence cover: covers losses from each event or occurrence, across all policies (common for casualty coverages)
Working layer
Clash covers
Per occurrence / catastrophe cover: covers a single large event (e.g., natural catastrophe)
Stop-loss / aggregate excess: protects net results

7. Example 1 Three reinsurance policies A 50% Quota Share
B Surplus Share with a retention of $40,000
C Pre risk excess of loss with a retention of $50,000
Primary policy
Limits Premium Loss
1 $100,000 $10, ,000
Reinsurance
A , ,000
B , ,000
C ? 10,000

8. Example 2 Primary policy Limits Premium Loss 2 $40,000 $6,000 30,000
2 $40, $6, ,000
Reinsurance
A , ,000
B None
C ?

9. Types of Reinsurers Professional reinsurers
General Re (Berkshire Hathaway), Swiss Re
Reinsurance departments of primary insurers
Travelers, CIGNA
Underwriting organizations, pools and associations
Lloyd’s of London

10. Other Reinsurance Program Issues
Pricing of reinsurance policies
Proportional: percentage of premium ceded (often with a “ceding commission” paid back to the primary insurer to cover expenses)
Excess: rate applied to primary insurer’s original premiums, in accordance with expected frequency and severity of losses to reinsurance layer
Multiple reinsurers on a reinsurance contract
Retrocessions
Reinsurance for reinsurers

11. Uses of Reinsurance Capacity Higher limits More policies Stability
Protection from catastrophes
Hurricanes, earthquakes
Enhanced financial strength (surplus strengthening)
Ease of entry and exit from a market
Accounting issues – can change timing of income and expenses

12. Alternatives to “Traditional” Reinsurance
Reinsurance is one of many “risk management” tools at the disposal of a primary insurer -- e.g.,
Refuse to write certain risks
“Co-insurance”
Reinsurance
Capital market / financial solutions

13. Beyond “Traditional” Reinsurance
“Newer” reinsurance products
Portfolio reinsurance
Finite (financial) reinsurance
Very recent advances
Integrated risk policies
Insurance securitization
Hedge funds writing reinsurance
Although some of these recent advances might be considered competitors of traditional reinsurance, many reinsurers have themselves embraced these new techniques (Swiss Re)