Reinsurance is a system of economic relations, during which original insurer is taking on insurance risk, part of the responsibility on them (taking into account their financial capacity) is transmitted to other insurers in order to create a balanced portfolio, ensuring financial sustainability and profitability of insurance operations.
With the help of reinsurance original insurer achieves not only the protection of his insurance portfolio from the impact of a series of large insurance claims or even a single catastrophic event, but also that the claim payment in such cases is not a heavy burden for one insurance company, and carried out collectively by all participants.
Classical structure of reinsurance could be represented as follows:
- forms of reinsurance: facultative and treaty;
- types of reinsurance: proportional and non-proportional;
- subtypes: quota share / surplus, excess of loss / stop loss.
In facultative reinsurance decision on the transmission and reception of each individual risk is made by the insurer and reinsurer in each case separately.
Under the treaty reinsurance contract the insurer agrees to transfer all the risks specifically identified in the agreed area of coverage, and the reinsurer is obliged to accept such risks in reinsurance.
Proportional reinsurance involves one or more reinsurers taking a stated percent share of each policy that an insurer produces. This means that the reinsurer will receive that stated percentage of each dollar of premiums and will pay that percentage of each dollar of losses.
The meaning of the non-proportional reinsurance is that the reinsurer's payments are determined exclusively by the amount of original loss. Premium for this type of reinsurance is usually determined as a percentage of annual premium received by the insurer for the insurance policies accepted and passed to the reinsurance portfolio.