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Types of Reinsurance

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Treaty Reinsurance

A treaty reinsurance is a type of reinsurance where an insurer (referred to as the ceding company) enters into an agreement with one or more reinsurers in order to cede to them a portfolio of risks, as defined in the respective reinsurance agreement or treaty. In such an agreement, the ceding company agrees to cede and the reinsurers agree to accept all the risks written by the ceding company that fall within the terms of the treaty, subject to the limits specified therein. Treaty reinsurances can be in the form of either proportional or nonproportional treaty reinsurance. In simple terms, the proportional treaties are intended to provide capacity while the non-proportional are designed to protect the risks retained by the reinsured entity. The most common forms of proportional treaties include Quota Share, Surplus and Facultative Obligatory treaties. For non-proportional types, the principal types include Risk Excess of Loss, Catastrophe Excess of Loss and Aggregate Excess of Loss treaties.

Facultative Reinsurance

This is the oldest form of reinsurance. Facultative reinsurance is a method of reinsurance where an insurance underwrite offers a risk to one or more reinsurance underwriters on an individual basis. The two parties have to negotiate on the terms and conditions for the placement of the risk in question. There is no obligation on the insurer to offer this risk and there is also no obligation on the reinsurer to accept the risk. In the most common form of facultative reinsurance, the reinsured party and the reinsurers share the premium and the risk on proportional basis. It is also possible for the facultative reinsurance placement to be arranged in such a way that the reinsurer does not have to pay proportional contribution on each claim. The agreement could be structured in such a way that the reinsurer will only pay claims that exceed a certain agreed level. This type of approach is known as non-proportional facultative reinsurance.

Statutory Reinsurance

Statutory reinsurance or obligatory reinsurance is a form of reinsurance that insurers in certain territories are required to cede, as defined by law in a defined territory. This can exist either in countries where there are national reinsurers or through regional agreements covering a number of countries. As part of the terms of the Africa Re Establishment Agreement of 1976, it was agreed amongst the members states that all insurers and reinsurers operating within the territories of the member states should cede a minimum of 5% of all their reinsurance treaty business to Africa Re. Notwithstanding the statutory cession agreement, Africa Re has progressed to a level where it focuses on voluntary cessions in the member states as well as in many other markets that are not covered by the agreement.

Reinsurance Underwriting Pools

A risk pool can be used to create underwriting capacity for areas of critical need not covered by traditional insurance and reinsurance companies. A pool is supposed to underwrite and accept risks using joint capacity from the different operators as well as reinsurance that may be arranged on behalf of the pool. Usually, such an arrangement is formalised in an agreement that outlines the basis on which the members of the pool can introduce risks into the pool and take a share of liability and respective premium after deduction of agreed fees and expenses of the pool. An underwriter or a financial consultant can be appointed as a pool manager with the responsibilities of handling the accounts of the pool on behalf of the members of the pool. Within the African Insurance Organisation (AIO) there are current two regional pools which are managed by Africa Re as follows:

  • The African Aviation Pool
  • The African Oil Engergy Insurance Pool
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