Reinsurance is basically a form of coverage intended for insurance providers. Generally speaking, this type of policy reduces the losses sustained by insurance companies by allowing them to recover all, or part, of the amounts they pay to claimants. Reinsurers help insurance providers avoid financial ruin in case a huge number of policyholders turn out to make their claims during catastrophic events. Below are some of the major types of reinsurance policies.
1. Facultative Coverage
This type of policy protects an insurance provider only for an individual, or a specified risk, or contract. If there are several risks or contracts that needed to be reinsured, each one must be negotiated separately. The reinsurer has all the right to accept or deny a facultative reinsurance proposal.
2. Reinsurance Treaty
Unlike a facultative policy, a treaty type of coverage is in effect for a specified period of time, rather than on a per risk, or contract basis. For the duration of the contract, the reinsurer agrees to cover all or a portion of the risks that may be incurred by the insurance company being covered.
3. Proportional Reinsurance
Under this type of coverage, the reinsurer will receive a prorated share of the premiums of all the policies sold by the insurance company being covered. Consequently, when claims are made, the reinsurer will also bear a portion of the losses. The proportion of the premiums and losses that will be shared by the reinsurer will be based on an agreed percentage. In a proportional coverage, the reinsurance company will also reimburse the insurance company for all processing, business acquisition and writing costs. Also known as ceding commission, such costs may be paid to the insurance company upfront.
4. Non-proportional Reinsurance
In a non-proportional type of coverage, the reinsurer will only get involved if the insurance company’s losses exceed a specified amount, which is referred to as priority or retention limit. Hence, the reinsurer does not have a proportional share in the premiums and losses of the insurance provider. The priority or retention limit may be based on a single type of risk or an entire business category.
5. Excess-of-Loss Reinsurance
This is actually a form of non-proportional coverage. The reinsurer will only cover the losses that exceed the insurance company’s retained limit. However, what makes this type of contract unique is that it is typically applied to catastrophic events. It can cover the insurance company either on a per occurrence basis or for all the cumulative losses within a specified period.
6. Risk-Attaching Reinsurance
Under this type of contract, all policy claims that are established during the effective period of the reinsurance coverage will be covered, regardless of whether the losses occurred outside the coverage period. Conversely, no coverage will be given on claims that originate outside the coverage period, even if the losses occurred while the reinsurance contract is in effect.
7. Loss-occurring Coverage
This is a type of treaty coverage where the insurance company can claim all losses that occur during the reinsurance contract period. The important factor to consider is when the losses have occurred and not when the claims have been made.
(Source – http://www.finweb.com/insurance/7-types-of-reinsurance.html#ixzz38ITR3kYn)