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Chapter 2 Different types of reinsurance 2/15

Key points

The main ideas covered by this chapter can be summarised as follows:
Main types of reinsurance Chapter
• Facultative reinsurance: 2
– Each risk considered is a separate insurance contract and insurers can offer, and reinsurers can accept, at their
option.
– Although most reinsurance is conducted under treaty, facultative reinsurance offers flexible solutions in one-off
circumstances.
– Its advantages include the ability to negotiate tailor-made cover and premiums that exactly match the risk that is
offered.
– Its disadvantages include lack of certainty and high administration costs.
• Treaty reinsurance:
– Obligations are imposed on the insurer to offer and the reinsurer to accept business that falls within the treaty
agreement.
– It is used where blocks of business can be placed with a reinsurer knowing that pre-agreed automatic cover is
available.
– Ceding and profit commission contribute to a lessening of the cost of this type of reinsurance to the insurer.
– Treaties represent binding arrangements that remove the element of choice from both parties; treaties can be
cost-ineffective on occasions when the insurer is obliged to cede risks it would rather retain.
• Distinctions between proportional and non-proportional methods:
– Facultative and treaty reinsurance can both be arranged on proportional and non-proportional bases.
– Proportional reinsurance implies that the insurer cedes an agreed percentage/proportion of the risk and the
reinsurer receives a corresponding share of the premium (less commission) and pays the same share of
any loss.
– Non-proportional reinsurance only requires the reinsurer to pays losses which exceed a specified monetary
retention by the reinsured, and the reinsurer’s premium is not proportional to its potential liability.
Differences between reinsurance and retrocession
• Retrocession refers to a transaction whereby a reinsurer cedes or passes to another reinsurer all or part of the Reference copy for CII Face to Face Training
reinsurance it has itself assumed.
• The difficulty of monitoring accumulation of exposure is accentuated when extended into the acceptance of
retrocession business.
• The retrocession market drives the reinsurance market and its influence affects both reinsurance and insurance
markets.