It is a business model that works when the sum of the premiums of all members is higher than that amount for the claims against the policy. There are times, however, when the paid claims by the insurance amount that the sum of money from policyholder premiums exceeded. In such cases, the insurer faces the greatest risk of loss.
This is where the reinsurers in the game. Reinsurance companies provide insurance to other insurers to protect against the conditions in which the traditional insurer has enough money to pay all claims against its written policy. One of the highest-profile reinsurance company is Berkshire Hathaway Reinsurance Group, which provides insurance to other property / casualty insurers and reinsurers. It is a subsidiary of Berkshire Hathaway Inc. (BRK-A).
In fact, a standard insurer can an excess of loss further spread by entering into a reinsurance contract. A reinsurance contract made between the reinsurer or assuming company, and reinsured or ceding company. There are two basic forms: reinsurance treaty and facultative reinsurance.
Treaty reinsurance occurs when the ceding company agrees to cede all risks within a particular class of insurance to the reinsurance company. In turn, the reinsurance company agrees to indemnify the ceding company containing all risks, even if the insurance company is taking over individual has not performed for each policy. Often, the reinsurance is true even for those policies, which not so long as they relate is written on the prearranged class.
The main feature of a treaty agreement is the lack of individual underwriting on behalf of assuming insurer. This structure transfers insurance risks of the ceding company to the assumption that business, making the assumption now exposed to the possibility that the initial acceptance process to ensure not adequately evaluated the risks.
There are several types of convention arrangements. The most common are called proportional treaties, in which a percentage of the original of the ceding insurer reinsured policies to a maximum. Any policies not covered above the limit by the reinsurance treaty.
So it would be going reinsurance company agreed 75% of auto policies from the original insurer, up to $ 100 million. This means that the ceding company will not be compensated for $ 25 million of the first $ 100 million in automobile policies written under the agreement; which $ 25 million is known as the ceding company “retention limit.” If the ceding company wrote $ 200 million worth of insurance, reserves $ 25 million of the first $ 100 million and $ 100 million each subsequent unless it controls a surplus treaty. In general, reinsurance policy, premiums are lower when retention limits are higher.
Facultative reinsurance occurs when the reinsurance company insists must be reinsured on the implementation of its own underwriting for some or all of the policy. Under these agreements, each optional endorsed policy is regarded as a single transaction, not lumped together by class. Such reinsurance contracts are usually less attractive to the ceding company, which may be forced to only the most risky policy.
That said, facultative reinsurance is usually the easiest way for an insurer to obtain reinsurance protection. These are the most easily to adapt to specific circumstances. Suppose a standard insurer gives a policy of large commercial real estate, such as a large corporate office. The policy is written for $ 35 million, meaning that the original insurer faces a potential $ 35 million in liability if the building badly damaged. Now suppose that the insurer considers that it can not afford to pay more than $ 15 million to cover any claims, so it looks to buy some reassurance to the additional $ 20 million. Given that the reinsurer only indemnify the final $ 20 million of the $ 35 million policy, or what is known as the “reinsurance assumed,” the ceding company retains liability on the first $ 15 million. The reinsurer must pay only once reached the claim $ 15 million and 1 cent.