Types of Reinsurance


The different types of reinsurances are given below: Reinsurance is broadly classified as facultative, treaty and pool

I. Facultative reinsurance 

In this case the individual risk is offered by an insurer for acceptance or rejection by a re-insurer. Both parties are free to act in their own best interests. In a facultative relationship the reinsurer retains the faculty or power to either accept or reject each individual risk offered to it by the insurer.

 II. Treaty reinsurance 

 A treaty is an agreement for the reinsurance of a specific portfolio, which may relate to certain class of business. The reinsurer assumes part or all of a ceding company's responsibility for certain sections of business. It is an obligatory contract and risk cedes automatically to the reinsurer as per the treaty.

Thus, for reinsurance of individual risk, facultative reinsurance is arranged while for the reinsurance of entire portfolio, treaties are arranged. Again, treaties reinsurance can be further segregated as proportional and non-proportional.

a. Proportional treaties:- The cedent and the re-insurer share a pre-decided percentage of premium and losses. This means that the reinsurer takes a stated percentage share of each policy that the insurer writes. In addition, the reinsurer allows a "ceding commission" to the insurer to compensate the insurer for the cost of writing and administering the business (agent's commission, paperwork etc)

b. Non-proportional treaties: A non-proportional treaty is an agreement whereby the reinsurer agrees to pay the ceding company all losses which exceed a certain specified limit. Under this treaty, the ceding company would pay all claims upto a specified amount. Any losses over the agreed amount would be paid by the reinsurer.

III Pool Reinsurance 

Under this method, no insurer will transact the business individually. All the premiums and other incomes are kept in the common pool. Claims are settled from the common pool. The share of each member of the pool is fixed and after meeting the claims, profits are shared by the members according to their proportion.

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