Basics of Reinsurance

Sindiswa Mabelwane
Agenda

What is Reinsurance Basic Example of Proportional treaty

Reasons for Reinsurance

Types of Reinsurance

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What is Reinsurance
What is Reinsurance

Reinsurance - insurance for insurance

companies”.

A reinsurance transaction is an
agreement between two or more
parties, the reinsured or ceding
company and reinsurer(s) . The
reinsurer(s) agree to accept a certain
Portion of the reinsured’s risk upon
terms and conditions as set out in the
agreement

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What is retrocession?

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Insurance Process
Uninsurable Risks?
• Risks that can not be diversified
• Non-damage business interruption Retrocession
• Pandemic risk
• Cyber risk ▪ Insurance for
Reinsurance Reinsurers
▪ Insurance for insurers ▪ Portfolio basis
Primary Insurer ▪ Reinsurers fail safe
▪ Mainly portfolio
▪ Deals with the public accounts
Insured ▪ Facultative mostly on
▪ Insurer individual
assets individual risk basis
▪ Individual
▪ Can be direct or ▪ Can be direct or
▪ Company
intermediated intermediated (RI
▪ Seeks indemnity in an broker)
event of a loss

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Purpose of Reinsurance
Why would an insurance company
take out reinsurance?

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Reasons for Reinsurance

Avoid Single
Large Loss

Limit Capacity
Accumulation increase

Smooth
Results

Diversification Financial
Assistance

Expertise

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Reinsurance Types
Reinsurance Types

Reinsurance forms

Obligatory (treaty) Facultative

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Reinsurance Types – Overview

Obligatory Facultative

➢ Primary Insurer and reinsurer enter ➢ Primary Insurer has the option of
into an agreement for an entire ceding a risk
portfolio of risks ➢ Reinsurer has the option to accept or to
➢ The primary insurer is obligated to decline
cede all business under the terms ➢ Each risk is considered individually
and conditions of the treaty
➢ Terms and conditions are negotiated
➢ The reinsurer is obligated to accept individually per risk ceded
all risks ceded by the reinsured
➢ The terms and conditions as
described in the contract schedule
and wording
Reinsurance Types

Facultative Obligatory (Treaty)

Proportional Non-Proportional Proportional Non-Proportional

Quota Share Excess of Loss Surplus Working Covers

Quota Share Umbrella Covers
Catastrophe Covers

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Reinsurance Types - Proportional

Liability, premium and losses are split proportionally

x%

x%

x%
Primary
Insurer y%
Primary y%
Primary y% Insurer
Insurer

Liability Premium Claim

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Reinsurance Types - Proportional

How do they work?

Primary insurer:
▪ Calculates premium including acquisition and
administration costs
▪ Cedes part of the original premium, including PI RI
the portion attributable to costs to the
reinsurer.
Reinsurer:
▪ Reimburses the costs via commission
▪ Pays % of losses

% of Losses + Commission

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Reinsurance Types – Non-Proportional

Non-Proportional
Reinsurance

• Reinsured undertakes to pay all losses up to a pre-agreed amount.

(Treaty Priority / Deductible.)
• Reinsurers pay the balance of losses that exceed this amount – but
only up to a pre-agreed limit. (Hence the terminology ‘Excess of
Loss’ / XoL.)
• Reinsured and Reinsurers do not share the risk, they share the loss
on an XoL basis.
• Loss can mean a single loss or an aggregation of losses.
• The premium is calculated and paid upfront.
Reinsurance Types – Non-Proportional

Primary Reinsurer
Insurer
Primary insurer: Reinsurer:

▪ Pays upfront premium ▪ Charges the rate at which they are

willing to accept the losses in excess of
▪ Fixed % of the Gross net premium the client's retention
income (GNPI)
▪ Pays losses in excess of the client's
▪ Minimum and deposit premium is often retention
applicable
▪ No commission is paid back
Reinsurance Types – Non-Proportional

Treaty structure: R 600,000 in excess of R 400,000

1,000,000

R 600,000 = Limit (of liability for Reinsurer)

400,000

Priority (paid by Reinsured)

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Basic Example
Basic Example – Quota share

Quota Share
Example

▪ The ratio of retained liability to ceded liability is the same for each
and every risk (up to treaty limit).

▪ Insurer cedes a fixed percentage of liabilities, premiums and claims,

irrespective of the sum insured.

▪ Treaty limit is a fixed amount. This is the maximum amount that can be
ceded into a treaty.
Basic Example – Quota share

Quota Share
Example

➢ An insured places 80% quota share treaty with Munich Re.

➢ Treaty capacity is 8000.
➢ What does that mean?
Treaty

20% 2…

80%
80%

Reinsurer option Reinsureds option

Questions!

Sindiswa Mabelwane
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Sindiswa Mabelwane
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