Reinsurance involves an insurance company ("cedent") transferring portions of risk from policies it has written to another insurance company ("reinsurer") in exchange for a portion of the premiums. It allows insurance companies to share risk, provide reserves and surplus relief, and enter fronting arrangements where the reinsurer takes on most of the underwriting and claims handling. There are two main types: facultative, which reinsures specific policies; and treaty, where blocks of policies are reinsured under an agreement. Reinsurance can be thought of as the insurance company hedging its bets, similar to how the person running a betting table protects themselves.
2. What is “reinsurance?”
• Insurance of insurance
• Contracts under which one company
(“reinsurer”) agrees to indemnify an
insurance company (“cedent”) against
liabilities arising from insurance policies
that it issued to policy holders
3. What is “insurance?”
• An ingenious modern game of chance in
which the player is permitted to enjoy the
comfortable conviction that he is beating
the man who keeps the table.” Ambrose
Bierce, The Devil’s Dictionary.
• Reinsurance could be characterized as:
“The means by which the man who keeps
the table hedges his bets.”
4. Why reinsure?
• Many reasons, including:
1. Risk Transfer/Spreading
2. Reserves and Surplus Relief
3. Fronting arrangements -- reinsurer bears all or
almost all of the ultimate risk and may handle the
insurance underwriting and claims.
6. Types of Reinsurance
Facultative v. Treaty Reinsurance
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