Fundamentals of Property and Casualty Reinsurance: Introduction

Reinsurance is a transaction in which one insurance company indemnifies, for a premium, another insurance company against all or part of the loss that it may sustain under its policy or policies of insurance.  The insurance company purchasing reinsurance is known as the ceding insurer; the company selling reinsurance is known as the assuming insurer, or, more simply, the reinsurer.  Described as the "insurance of insurance companies," reinsurance provides reimbursement to the ceding insurer for losses covered by the reinsurance agreement.  The fundamental objective of insurance, to spread the risk so that no single entity finds itself saddled with a financial burden beyond its ability to pay, is enhanced by reinsurance.

Although to many reinsurance is an unknown aspect of the insurance industry, its roots can be traced as far back as the late 14th century.  Since that time, reinsurance has evolved into the business it is today.  While the early focus of reinsurance was in the lines of marine and fire insurance, it has expanded during the last century to encompass virtually every aspect of the modern insurance market.

Reinsurance can be purchased from three distinct sources:  reinsurance companies located in the United States, reinsurance departments of U.S. primary insurance companies, and alien reinsurers that are located outside the U.S. and not licensed here.  The ceding insurer may purchase reinsurance directly from a reinsurer or through a broker or reinsurance intermediary.

Reinsurance may be written on either a proportional basis or excess of loss basis.  A reinsurance contract written on a proportional basis simply prorates all premiums, losses and expenses between the insurer and the reinsurer on a pre-arranged basis.  The proportional approach is used extensively in property reinsurance.  Excess of loss contracts, on the other hand, require the primary insurer to keep all losses up to a predetermined level of retention, and the reinsurer to reimburse the company for any losses above that level of retention, up to the limits of the reinsurance contract.  In simplest terms, a retention is analogous to the deductible a policyholder may have on a personal insurance policy, such as an automobile or homeowner's policy.

NEXT: Purposes of Reinsurance

(The complete Fundamentals of Reinsurance with a Glossary of Reinsurance Terms is also available for the Kindle and in hard-copy at Amazon.)

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Demystifying Reinsurance was an excellent tool to clearly understand and break down the basics. Very good class and recommend it for beginners and even as a refresher course for the intermediate student.”
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“This has been the best reinsurance seminar that I have been to! Whether a reinsurance seasoned vet or new to the field, this is an engaging seminar that addressed specific issues of the reinsurance market.”
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“Broadened my business horizon as well as my overall knowledge.”
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“The panels and presentations were thought provoking and fascinating as numerous topics were covered affecting the industry. I’m leaving the conference with a greater insight of the future market.”
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“RAA Re Finance was the first RAA seminar I attended, and I was thoroughly impressed with the speakers and content. I learned a great deal from the presentations and intend to bring some new ideas back to my company and share with the team!”
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