Reinsurance is the method by which a self insurance is made by an insurance company. By the insurer company is able to share the risk it undertakes with some other insurer company too so that the risk becomes less. This becomes necessary when an insurance company is supposed to face huge claims like one that occurs due to natural calamities. When this type of events occur insurance companies will have to pay at a time large number of claims. Thus the company might become bankrupt if no protection is provided to it. When such a company is reinsured it can claim protection to some extent of the loss incurred by it. We can see that several small insurance companies have closed down after September 11 attack of twin tower. Such a tragedy can be avoided with the aid of reinsurance.
Reinsurance types can be mainly classified in to facultative reinsurance and treaty insurance.
Treaty reinsurance is the type in which a portion of the business is insured by way of reinsurance. At times a business is completely reinsured in this reinsurance types. The portion is decided according to the policy terms and conditions. In these reinsurance types the insurer company has to insure the business and as per the terms of contract reinsurer will assume the insured business. These reinsurance types are preferred when risks are considered in groups of similar types.
Facultative reinsurance is the reinsurance types in which a particular type of risk that underlies a contract is only considered. In these reinsurance types it is on considering the terms and conditions that the reinsurance is made and the extent is decided. Reinsurance is made for the policy as a whole or for a part of it according to the terms and conditions. In this method risk of insurer is less from a single policy. But at the same time this reinsurance types is non obligatory too.
Proportional Reinsurance: In this method of reinsurance types the risk as well as premium is shared by two companies. In the method a ceding commission is paid by the reinsurer.
Pro – rata Reinsurance: This reinsurance types makes a classification of way by which risk is covered by two companies. Here a decision about what percent of risk and premium will be covered by insurer and reinsurer is made earlier. These reinsurance types are more popular for it provides more protection than any other type of reinsurance types.
Pro – rata reinsurance types are two. They are Quota Share Pro-Rata Reinsurance where a fixed proportion of premium amount is ceded by insurer for the risks that are accepted. Next reinsurance types are Surplus Share Pro-Rata Reinsurance where a risk that exceeds an amount that is predetermined is the only thing that is ceded. In this case not every risk is ceded.
Non-Proportional Reinsurance is the reinsurance types in which reinsurance is given only to a loss that occurs above certain amount.
Excess of loss: In the next type called Excess of loss in a business only single risk is covered. Catastrophe reinsurance is the type of excess of loss in which there is greater flexibility. Next type is Stop loss reinsurance types in which whole account is covered and it is also known bythe name excessive loss ratio insurance.