Types of reinsurance

Types of reinsurance



Depending on form of mutually undertaken liabilities of reinsured and reinsurer reinsurance agreements can be divided into:

Facultative;

Obligatory;

Facultative-obligatory;

Obligatory-facultative.

Reinsurance process itself calls accordingly facultative, obligatory or facultative-obligatory.

For several centuries the only type used was facultative reinsurance of separate risks.

Reinsurance started to develop actively and new types of reinsurance protection appeared only in 19 century.



Facultative reinsurance



Facultative reinsurance agreement is connected with one risk in one deal. That type or reinsurance allows reinsured to get the exact idea about risk offered to him before undertaking liabilitiesin accordance with reinsurance agreement.

Term “facultative reinsurance” means that direct insurer itself chooses to whom offer the risk for reinsurance and reinsurer decides whether to accept part of the risk or not and if yes in what size.

Proposal from direct insurer on facultative reinsurance must contain all essential information about the risk that will allow reinsurer to assess the risk accurately.

After reinsurer carefully studied the information connected with the risk he informs insurer about share in percent or insurance amount he will accept for facultative reinsurance.



Usually confirmation is made by phone, telex or by sending signed copy of proposal with indication of share reinsurer agrees to accept. Conditions of reinsurance agreement signed such way usually define once again after some time in written form signed by both parties.

Reinsurercanrefusethe offered risk.He can shortly specify reasons of refusal. Also he can propose direct insurer other conditionsof reinsurance agreement he agree to sign. In case reinsurer does not give the answer to proposal his silence shall not be considered as acceptance.

Facultative reinsurance agreement shall come into force from the moment of accept receiving if otherwise agreed by the parties. Essentialchangesinconditionsof directinsuranceagreementduring its valid period are obligatory for reinsurer only when he gives his consent.

Facultative reinsurance agreement shall terminate automatically upon expirationof agreementif otherwise agreed by the parties. Usually insurer offers reinsurer to prolong agreement prior to renewal and informs him on changes in conditions of direct insurance agreement and statistics of agreement passing. Reinsurer can refuse from prolongation of agreement.

The task of reinsurer in facultative reinsurance is not limited by extension of financial possibilities of direct insurer and in a number of occasions includes assistance at risk estimation and defining of insurance agreement conditions and damage prevention measures. Often they perform joint risk survey at location of object insured.



In spite of facultative reinsurance requires big material and time expenditures its meaning is increasingconstantly. To some extend the reason for that is in the result of technological development amounts of insurance coverage have increased sufficiently and risks have become more complicated.

Also there are defects in facultative reinsurance.

It is obvious that period of time for facultative reinsurance is long enough therefore insured can apply to other company or other insurer can offer its services and it can cause not only material damage but company’s image damage.

Providing of full information about the risk whenconducting facultative reinsurancesfrequently givescompetitors certain idea about insurance policy of shifting company. Reinsured has no right to change insurance conditions without reinsurer’s consent. Besides expenses on issuing of facultative reinsurance are high enough especially having in mind possibility of multiple facultative offer.  Necessity in recovering of reinsurance cover together with refusal from any participant of the agreement of reinsurers from such recovery stipulate new expenses.



Obligatory reinsurance



Reinsurers receive considerable volume of reinsurance premium from obligatory reinsurance agreements.

Obligatory reinsurance establishes more tight connection between parties rather than singular reinsurance assignments. The most important principles of obligatory reinsurance were formed due to reinsurance with establishing participant share and surplus reinsurance. Not all of them have force in relation to non-proportional reinsurance on obligatory basis.

In accordance with obligatory reinsurance agreement cedent is obliged to transfer to reinsuranceall precisely described risks, i.e. reinsurer who obliged to accept these risks does not define and estimate risks in each case.

Cedent has the right to accept risksandefine insurance premiumat his own discretion. Besides he must settle losses as he finds appropriate for common interests of insurer and reinsurer. In case cedent acts with rough carelessness or with intention to harm reinsurer’s interest the last will not be connected with ceden’s decision. Thusreinsurer’sresponsibilityto follow cedent’s action isrelated to cedent’s right to manage its business. In other words size and limit of liabilityto follow cedent’s actions corresponds to the right of insurer-cedent to manage its business.

Reinsurance payments under obligatory reinsurance agreement are defined in percent from amount of insurance payments received by insurer at signing of direct insurance agreement.

Obligatory reinsurance agreement shall be signed for indefinite period with the right of mutual termination. Such agreement is advantageous for cedent as all predetermined risks automatically covered by the reinsurer.



Facultative-obligatory reinsurance



In accordance with facultative-obligatory agreement (mixed type of reinsurance) ceding company has the right to transfer or keep the accepted risks or their part.

Reinsurer under such agreement is obliged to accept risks specified by the agreement.

Facultative part is for reinsured and obligatory part of agreement is for reinsurer. For reinsured it is possible to choose risks that will be transferred for reinsurance and establishe size of transfer.

Reinsurer entering into such agreement must to reasonable extent trust to transferring company since balance of its portfolio depends on it. For reinsurers such agreement is not always interesting since number of transfers can be small but responsibility is high enough. Conjuncture in comparison with normal risks influence on acceptance of such risks and therefore rates can be lower than estimated. All that has impact on portfolio balance.Therefore reinsurers often prefer usual facultative reinsurance.



Obligatory-facultative reinsurance



Obligatory-facultative reinsurance assumes obligation for reinsured and facultative for reinsurer. Scope of this agreement is not limited but often companies have such agreements with their branch offices. That type of agreement gives reinsurerpossibility to control insurance policy of reinsurer that in relation of independent parties not always willing for ceding company and it means that signing of such agreement becomes possible only at certain relations.

Besides reinsurer has possibility to choose the most risks profitable risks that is also unwilling for independent reinsured since it can break balance of portfolio or evoke additional problems in placement of risks.

In general reinsurance agreements are divided into two main groups:

Proportional reinsurance agreements

Non-proportional reinsurance agreements