Introduction to Reinsurance
Reinsurance is a critical concept in the insurance industry, acting as a form of 'insurance for insurers.' It allows insurance companies to transfer a portion of their risk to another insurance company, known as a reinsurer. This practice is fundamental to managing large or catastrophic losses, stabilizing financial results, and increasing underwriting capacity.
Why Reinsure?
Primary insurers engage in reinsurance for several key reasons:
Types of Reinsurance
Reinsurance can be broadly categorized into two main types: Facultative and Treaty.
| Feature | Facultative Reinsurance | Treaty Reinsurance |
|---|---|---|
| Scope | Covers individual risks or specific policies. | Covers a portfolio or class of business. |
| Negotiation | Negotiated on a case-by-case basis. | Negotiated for a specified period and class of business. |
| Obligation | Both insurer and reinsurer have the option to accept or reject each risk. | Reinsurer is obligated to accept all risks within the treaty's scope; insurer is obligated to cede them. |
| Flexibility | High flexibility for unique or large risks. | Less flexible, but more efficient for standard business. |
| Administration | More administrative effort per risk. | More streamlined administration. |
Treaty Reinsurance Subtypes
Treaty reinsurance is further divided into proportional and non-proportional arrangements:
Think of proportional reinsurance like splitting a pizza evenly, while non-proportional is like having a safety net that only catches you if you fall below a certain height.
Reinsurance and Actuarial Exams
Understanding reinsurance is crucial for actuarial exams, particularly those focused on risk management, insurance operations, and financial mathematics. Actuaries need to be able to model the impact of reinsurance on an insurer's financial statements, assess the adequacy of reinsurance programs, and price reinsurance contracts.
To transfer a portion of its risk to another insurance company (reinsurer).
Facultative and Treaty.
Both premiums and losses.
Learning Resources
Official study notes from the Society of Actuaries that often cover foundational insurance concepts, including reinsurance, relevant for actuarial exams.
An accessible overview of reinsurance from a leading global reinsurer, explaining its purpose and basic mechanisms.
A comprehensive explanation of reinsurance, its types, and its importance in the financial industry, suitable for understanding core concepts.
A foundational paper from The Geneva Association, providing a clear and concise introduction to the principles and functions of reinsurance.
A straightforward primer on reinsurance, covering its role in the insurance ecosystem and its benefits for primary insurers.
Insights from Munich Re on the fundamental aspects of reinsurance, including its strategic importance and different forms.
An explanation of reinsurance from the perspective of Lloyd's, a key player in the global insurance and reinsurance market.
An article that breaks down the concept of reinsurance in simple terms, making it accessible for those new to the subject.
A broad overview of reinsurance, its history, types, and economic impact, offering a good starting point for research.
A video explaining the core concepts of reinsurance in an easy-to-understand format, beneficial for visual learners.