Basics of Reinsurance

Presented by: Sindiswa Mabelwane

Agenda

• Date: 4 June 2021
• Understanding Reinsurance
• Reasons for Reinsurance
• Types of Reinsurance

What is Reinsurance?

• Described as insurance for insurance companies.
• A reinsurance transaction involves:
  • Agreement between the reinsured (ceding company) and reinsurer(s).
  • Reinsurer(s) accept a portion of the reinsured's risk based on agreed terms.

Key Terms:

• Retrocession: When a reinsurer obtains reinsurance.
• Insurance Process for Reinsurers:
  • Mostly on a portfolio basis.
  • Can be direct or intermediated.
  • Facultative mostly on individual risk basis.

Uninsurable Risks

• Risks that cannot be diversified:
  • Non-damage business interruption.
  • Pandemic risk.
  • Cyber risk.

Purpose of Reinsurance

• Reasons for taking reinsurance:
  • Limit Accumulation: Protect against large accumulations of risk.
  • Diversification: Spread risks to avoid single large losses.
  • Smooth Results: Stabilize financial results.
  • Financial Assistance: Provides additional capacity.
  • Expertise: Gain from reinsurer's expertise.
  • Capacity Increase: Expand underwriting capacity.

Reinsurance Types

• Facultative Reinsurance:
  • Primary insurer can choose to cede a risk.
  • Reinsurer can accept or decline individually.
• Obligatory (Treaty) Reinsurance:
  • Agreement for a portfolio of risks.
  • Obligatory ceding and accepting of risks.

Proportional Reinsurance

• Liability, premiums, and losses are split proportionally.
  • Primary Insurer: Calculates premiums including costs.
  • Reinsurer: Reimburses costs via commission and pays a share of losses.

Non-Proportional Reinsurance

• Reinsured pays all losses up to a deductible.
• Reinsurers cover excess losses up to a limit.
• No sharing of risk, only sharing of loss.

Treaty Structure Example

• Priority: R 400,000 (paid by Reinsured)
• Limit: R 600,000 for Reinsurer

Basic Example: Quota Share

• Ratio of retained to ceded liability is consistent for every risk.
• Fixed percentage of liabilities, premiums, and claims are ceded.
• Maximum treaty limit is predefined.
• Example: 80% Quota Share Treaty with Munich Re, capacity of 8000.

Conclusion

• Thank you and feedback request by Sindiswa Mabelwane.
• Interaction encouraged via menti.com with code 3287 013.