1. Reinsurance
Insurers purchase reinsurance largely for the same reasons that people and organizations purchase insurance
“Insurance for insurers”
Functions of reinsurance
Capacity: can write more business and larger policy limits
Financial: can alter timing of income (and thus financial results)
Stabilization (of underwriting results)
Catastrophe protection
Underwriting advice

2. Example: Stabilization and Catastrophe Protection

3. Example: Stabilization and Catastrophe Protection (cont.)

4. 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”)

5. Types of Reinsurance Treaty versus facultative
Treaty: reinsures a group of the insurer’s policies
Facultative: reinsures a specific risk written by the insurer
Proportional versus excess (non-proportional)
Proportional (pro rata): losses and premiums split between insurer and reinsurer on a percentage basis
Excess-of-loss: reinsures losses above a certain amount

6. Types of Reinsurance (cont.)
Forms of pro rata 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)

7. 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

8. Example: Reinsurance Program
Suppose a primary insurer writes policies with the following characteristics:
Homeowners policies
$1,000 deductible, $200,000 policy limit
Suppose the insurer has the following reinsurance program in place:
Quota share: cede 60% of first $ 100,000 of each loss
Per-risk excess: $ 90,000 x/s $ 50,000
The quota share “inures to the benefit of” the per-risk excess

9. Example: Reinsurance Program (cont.)
How would each of the following losses be split?
Policy- Primary Q/S Excess
Loss holder Insurer Reinsurer Reinsurer $
20,000
111,000
121,000
251,000

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
Where does an original dollar of loss eventually end up?

11. The Reinsurance Marketplace
Direct versus broker markets
Types of reinsurers
Professional reinsurers
Reinsurance departments / divisions of primary insurers
Government organizations, pools, and associations
Lloyd’s of London

12. The Reinsurance Marketplace (cont.)
Some of the major players
General Re / Berkshire Hathaway
American Re
Employers Re
Zurich Re
Everest Re
Swiss Re
St. Paul Re
SCOR Re

13. 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

14. Beyond “Traditional” Reinsurance
“Newer” reinsurance products
Portfolio reinsurance
Finite (financial) reinsurance
Very recent advances
Integrated risk policies
Insurance securitization
Interestingly, although some of these recent advances might be considered competitors of traditional reinsurance, many reinsurers have themselves embraced these new techniques