Article

Reinsurance is like insurance for insurance companies. It’s a way for insurance companies to protect themselves by sharing some of the risks they take on with other insurance companies. In fact, many captive insurance companies primary risks are actually reinsured from other insurers.

Here’s how it works:

How It Works

• Risk Sharing: An insurance company (the primary insurer) pays another company (the reinsurer) to take on part of the risk. This means if there are big claims, the reinsurer helps pay them.
• Financial Stability: By sharing the risk, the primary insurer can handle more policies and bigger risks without worrying about unwanted losses.
• Protection Against Big Events: Reinsurance helps protect against major disasters, like hurricanes or earthquakes, which could lead to large claims from a single event. This type of reinsurance is often provided on a specific/per-occurrence basis.
• Protection Against Accumulation of Small Events:  Reinsurance can help protect against scenarios where an insurer may be concerned about the potential for a lot of smaller claims impacting underwriting profit.  This type of reinsurance is often provided on an aggregate basis.

Types of Reinsurance

There are two main types of reinsurance:

Facultative Reinsurance

• Individual Risk: This covers specific, individual risks. Each risk is considered one at a time.
• Example: Single parent captives that reinsure rated insurance carriers typically participate in risk via facultative (“often referred to as “FAC”) arrangements.

Treaty Reinsurance

• Group of Risks: This covers a group of policies, not just individual ones.
• Example: Captives that participate in risk pools or group captives often participate in treaty reinsurance.

Proportional vs. Non-Proportional Reinsurance

Reinsurance can also be divided based on how costs and risks are shared:

Proportional Reinsurance

• Quota Share/Shared Costs and Claims: The primary insurer and the reinsurer share the premiums and claims in a set proportion.
• Example: If the reinsurer takes 30% of the risk, it gets 30% of the premiums and pays 30% of the claims.

Layered/Non-Proportional Reinsurance

• Excess of Loss: The reinsurer only pays when claims exceed a certain amount.
• Example: The reinsurer might cover all claims above $1 million.

Benefits of Reinsurance

• Risk Management: Helps insurers manage and spread their risk.
• Financial Stability: Protects against large losses.
• Increased Capacity: Allows insurers to take on more policies.
• Expertise: Reinsurers often provide valuable advice and support.

Interested in exploring potential reinsurance options for a captive insurance transaction?  Captives.Insure can help identify, structure, and place reinsurance options that are tailor-made for your needs.

Learn More About Captive Reinsurance