Understanding Reinsurance

Understanding Reinsurance

Reinsurance is also referred to as insurance for insurers or stop-loss insurance. Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to minimise the likelihood of paying a huge obligation which resulted from an insurance claim.

The party that varies its insurance portfolio is called as the ceding party. The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer.

Types of Reinsurance

Below are some of the main types of reinsurance policies:-

  1. Facultative Coverage

This kind of policy protects an insurance provider only for an individual, or a specified risk, or contract. If there are various risks or contracts that are required to be reinsured, each one must be negotiated separately. The reinsurer has all the right to accept or deny a facultative reinsurance proposal.

  1. Reinsurance Treaty

Unlike a facultative policy, a treaty type of coverage is in impact for a specified period of time, instead on a per risk, or contract basis. For the duration of the contract, the reinsurer agrees to cover all or a portion of the risks that can be incurred by the insurance company being covered.

  1. Proportional Reinsurance

Under this kind of coverage, the reinsurer will receive a prorated share of the premiums of all the policies sold by the insurance company being covered. As a result, when claims are made, the reinsurer will also bear a portion of the losses. The proportion of the premiums and losses that will be shared by the reinsurer will be based on an agreed percentage. In a proportional coverage, the Reinsurance Company will also reimburse the insurance company for all processing, business acquisition and writing costs. Also referred to as ceding commission, like costs can be paid to the insurance company upfront.

  1. Non-proportional Reinsurance

In a non-proportional type of coverage, the reinsurer will only get involved if the insurance company’s losses exceed a particular amount, which is referred to as priority or retention limit. Hence, the reinsurer does not have a proportional share in the premiums and losses of the insurance provider. The priority or retention limit may be based on a single type of risk or an entire business category.

  1. Excess-of-Loss Reinsurance

This is actually a form of non-proportional coverage. The reinsurer will only cover the losses that exceed the insurance company’s retained limit. However, what makes this type of contract unique is that it is typically applied to catastrophic events. It can cover the insurance company either on a per occurrence basis or for all the cumulative losses within a specified period.

  1. Risk-Attaching Reinsurance

Under this type of contract, all policy claims that are established during the effective period of the reinsurance coverage will be covered, irrespective of whether the losses occurred outside the coverage period. On the contrary, no coverage will be given on claims that originate outside the coverage period, even if the losses occurred while the reinsurance contract is in impact.

  1. Loss-Occurring Coverage

This is a kind of treaty coverage where the insurance company can claim all losses which happen in the reinsurance contract period. The essential factor to consider is when the losses have occurred and not when the claims have been made.

Roles of Reinsurance Companies

Reinsurance companies are employed by insurance companies to:-

  1. Transfer Risk

Insurance companies can issue policies with higher limits owing to some of the risk being offset to the reinsurer.

  1. Easy Income

The income of insurance companies can be more foreseeable by transferring highly risky insurance liabilities to reinsurers to grasp possibly huge losses.

  1. Maintain Less Capital Handy

By offsetting the threat of loss in insurance liabilities, insurance companies do not require to maintain as much capital on hand to cover potential losses. Thus, they can invest the capital elsewhere to elevate their revenues.

  1. Underwrite More Policies

Reinsurance allows insurance companies to underwrite more policies, because of a portion of their liabilities being transferred to reinsurers. This permits insurance companies to engage with more risks.

  1. Lower Claimant Pay-out in Time of Natural Calamity

Natural calamity like earthquakes and hurricanes can cause claims to be unusually high. In such instances, an insurance company can possibly go bankrupt by having to issue out payments to all the claimants. By shifting part of the insurance liabilities to reinsurers, insurance companies manage to stay afloat during such unfortunate and extreme cases.

  1. Understand Arbitrage Opportunities

Insurance companies can possibly buy reinsurance coverage from reinsurers at a rate lower than what they charge their clients. Reinsurers use their own models to assess the riskiness of policies. Hence, reinsurers can accept a lower insurance premium from the insurance company if they deem it as less risky.

Labuan Reinsurance License

A Labuan reinsurance business is an insurance business whereby the reinsurer assumes a part of the liability under an original contract of insurance of another insurer or reinsurer. A Labuan reinsurer can be conducting either a general or life reinsurance business.

To better understand the process and guidelines in obtaining a Labuan Reinsurance License, connect with QX Trust consultants at +60 3 9212 6940 or consultant@qx-trust.com.