What Does Reinsurance Agreement Mean

In the case of non-proportional reinsurance, the reinsurer pays only if the total losses incurred by the insurer during a given period exceed a reported amount called a «deductible» or «priority». For example, the insurer may be willing to accept a total loss of up to $1 million and purchase a $4 million reinsurance layer that goes beyond $1 million. Then, if a loss of $3 million were to occur, the insurer would bear $1 million in damages and claim $2 million from its reinsurer. In this example, the insurer also retains a deductible of more than $5 million, unless it has acquired another excess layer of reinsurance. Reinsurance allows insurers to remain solvent by recovering some or all of the amounts paid to claimants. Reinsurance reduces net liability for individual risks and civil protection against major or multiple losses. The practice also offers cedars seeking reinsurance the opportunity to increase their underwriting capabilities in terms of the number and extent of risks. With regard to solvency, there is the issue of reinsurance «recoverables», payments made by the reinsurer. In the mid-1980s, some reinsurance companies that had engaged in reinsurance during the period of high interest rates in the early 1980s due to insolvencies or other problems left the market. (When interest rates are high, some insurance/reinsurance companies try to increase their market share to have more premiums for investments. Those who don`t pay attention to the risk of the business they subscribe to may end up charging too little coverage and going bankrupt as a result.) As a result, some of the insurers that reinsured their activities with these now-defunct companies were unable to recover the funds owed to them in their reinsurance contracts. Catastrophe bonds and other alternative risk financing instruments: The shortage and high cost of traditional catastrophe reinsurance triggered by Hurricane Andrew and lower interest rates that have pushed investors looking for higher yields have sparked interest in securitizing insurance risks.

Precursors to what is known as true securitization included conditional financing bonds, such as those issued in 1996 for the Florida Windstorm Association, which provided liquidity in the event of a disaster but had to be repaid after a loss, and any excess notes — an agreement with a bank or other lender that would significantly reduce policyholders` surplus in the event of a mega-disaster. The funds would be made available at a predetermined price. The funds to pay for the transaction, if money is needed, are held in U.S. Treasuries. Excess notes are not considered debts and therefore do not impede an insurer`s ability to take out additional insurance. In addition, there were stock stakes, whereby an insurer received a sum of money in exchange for shares or other options in the event of a catastrophic loss. Another more recent innovation is the sidecar. These are relatively simple arrangements that allow a reinsurer to transfer a limited and specific risk, such as the risk of an earthquake or hurricane in a particular geographic area over a period of time, to another reinsurer or group of investors, such as . B hedge funds.

Parallel transactions are much smaller and less complex than catastrophe bonds and are usually placed privately rather than in marketable securities. In the case of sidecars, investors participate with the reinsurer in the result generated by the company. While a catastrophe bond could be considered a non-life reinsurance surplus if one assumes the highest loss classes for a rare but potentially highly destructive event, sidecars are similar to reinsurance contracts in which the reinsurer and the main insurer participate in the results. In the case of excess disasters, the transferor`s deductible is usually a multiple of the limits of the underlying policy, and the reinsurance contract usually includes a guarantee with two risks (i.e. they are intended to protect the transferor against catastrophic events involving more than one policy, usually a large number of policies). For example, an insurance company issues home insurance policies with limits of up to $500,000 and then purchases $22,000,000 in catastrophe reinsurance over $3,000,000. In this case, the insurance company would only recover from reinsurers in the event of multiple insurance losses in a single event (e.B. hurricane, earthquake, flood). For each risk, the transferor`s insurance limits are higher than the reinsurance holdback.

For example, an insurance company could insure commercial real estate risks with policy limits of up to $10 million and then purchase $5 million in reinsurance per risk of more than $5 million. In this case, a loss of $6 million resulting from this policy will result in the recovery of $1 million from the reinsurer. These contracts typically include event limits to prevent their misuse as a replacement for XL disasters. When an insurance company enters into a reinsurance contract with another insurance company, it is called contract reinsurance. Description: In the case of contractual reinsurance, the company that sells the insurance policies to another insurance company is called a transferring company. Reinsurance frees up the capital of the transferring company and helps to increase the solvency margin. It also allows the reinsurance business to continue to grow. Traditionally, reinsurance transactions have taken place between two insurance companies: the main insurer, which sold the original insurance policies, and the reinsurer. Most still are. Primary insurers and reinsurers can share both premiums and losses, or reinsurers can cover the losses of the primary company beyond a certain dollar limit for a fee. However, risks of various kinds, especially natural disasters, are now sold by insurers and reinsurers to institutional investors in the form of catastrophe bonds and other alternative risk diversification mechanisms.

Increasingly, new products reflect a progressive mix of reinsurance and investment banking, see also background. After Hurricane Andrew hit South Florida in 1992, causing $15.5 billion in insured losses at the time, it became clear that U.S. insurers had seriously underestimated the extent of their liability for property damage in the event of a mega-disaster. Until Hurricane Andrew, the industry considered $8 billion to be the largest possible catastrophic loss. Reinsurers then reassessed their position, leading early companies to reconsider their catastrophic reinsurance needs. When reinsurance prices were high and capacity was scarce due to the high risk of natural disasters, some primary companies turned to capital markets for innovative financing options. Because CCRIF uses what is known as parametric insurance to calculate claims payments, claims are paid quickly. In a parametric system, claims payments are triggered by the occurrence of a specific event that can be objectively verified. B for example a hurricane reaching a certain wind speed or an earthquake that reaches a certain threshold of ground vibration, rather than actual losses measured by a setter, a process that can take months. Even if the reinsurer does not immediately take out each individual policy, he still undertakes to cover all risks in a reinsurance contract. Excess reinsurance is a type of non-proportional coverage where the reinsurer covers losses that exceed the limit set by the insurer […].

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