Understanding Specific and Aggregate Reinsurance
Specific Reinsurance:
Specific reinsurance, also called facultative reinsurance, is coverage negotiated on a per-policy or per-risk basis. Each insurance policy is individually assessed, underwritten, and reinsured, allowing for customized terms and pricing that reflect the unique risk profile of each exposure. This approach is particularly useful when a captive wants to limit its total exposure to less than the policy limit. For example, the captive can issue a primary $5m Per Occurrence property policy, with a captive retention of $1m per occurrence. Reinsurance picks up excess of the captive retention, limiting the total exposure to the captive.
Aggregate Reinsurance:
Aggregate reinsurance, often referred to as aggregate stop-loss reinsurance, protects the captive against the cumulative effect of multiple losses over a set period—typically a policy year. Under this arrangement, the reinsurer covers losses that exceed a pre-defined aggregate attachment point. For instance, if a captive’s total claims in a year surpass $500,000, the reinsurer would pay amounts above that threshold. This mechanism caps the captive’s total exposure, providing a financial backstop against an unexpectedly high frequency or severity of claims.
How Captives Use Specific and Aggregate Reinsurance
Enhancing Financial Stability and Flexibility:
Reinsurance enables captives to expand their capacity, stabilize premiums, and protect against catastrophic or aggregate loss events. By ceding specific, high-severity risks or limiting total annual losses, captives can maintain solvency, optimize capital allocation, and confidently underwrite broader or more volatile risks.
Tailoring Risk Retention:
Captives can strategically combine specific and aggregate reinsurance to align with their risk appetite and financial objectives. For example, a captive might retain predictable, low-severity losses while transferring infrequent, high-severity risks (via specific reinsurance) and capping total annual losses (via aggregate reinsurance). This layered approach allows for precise control over risk retention and cost management.
Supporting Growth and Innovation:
Access to the reinsurance market empowers captives to take on new or emerging risks—such as cyber liability or environmental exposures—that may be hard to place in the traditional insurance market. By “incubating” these risks with reinsurance support, captives can develop expertise and historical data, eventually retaining more risk as their confidence grows.
Use Cases in Captive Insurance
1. Managing Catastrophic Exposures:
A multinational manufacturer’s captive might insure its global property portfolio but seek specific reinsurance for facilities in hurricane-prone regions. This ensures that a single catastrophic event does not threaten the captive’s capital.
2. Capping Total Claims:
A healthcare captive could use aggregate stop-loss reinsurance to limit the total claims paid across all member hospitals in a year. If claims spike due to an unforeseen outbreak, the reinsurer absorbs losses above the aggregate threshold, protecting the captive and its members from financial distress. A property and casaulty captive could also place an aggregate or "stop-loss" limit on the captive retention, limiting the total exposure to loss.
3. Supporting New or Volatile Risks:
When a business enters a new line of business—such as offering cyber insurance through its captive—it may initially rely heavily on reinsurance. As loss experience develops and risk management improves, the captive can gradually retain more risk, reducing reinsurance costs over time.
The Strategic Value of Reinsurance in Captives
Reinsurance is a strategic lever that enables captives to:
By thoughtfully structuring specific and aggregate reinsurance, captives can achieve the optimal balance between risk retention and transfer, supporting both immediate financial goals and long-term resilience.
Specific and aggregate reinsurance are essential components of advanced captive insurance programs. They empower captives to tailor their risk profile, protect against both individual and cumulative loss events, and unlock new opportunities for growth and innovation. C.I. provides solutions for spec and aggregate reinsurance, allowing the captive to reap the rewards of underwriting profit, and limiting the total exposure to loss. Read the case study here, where C.I. provided a primary $1m/$2m General Liability policy, with a captive retention of $500k per occurrence.
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