What is Reinsurance?
In simple terms, reinsurance is insurance for insurers. It’s also known as stop loss insurance. Reinsurance is a type of coverage that allows insurance companies to remain solvent. Being reinsured reduces the likelihood of insurance companies paying a large obligation resulting from an insurance claim.
The goal with reinsurance is for an insurance company to diversify their portfolio and spread out their risks. This provides an insurance company with more security to withstand the financial burden of insurance claims, particularly when unusual or major events occur.
Reinsurance allows insurance businesses the opportunity to increase their underwriting capabilities. Insurance businesses who seek reinsurance can increase both the number of policies they write but also the size of the risks they take on.
Types of Reinsurance and Stop Loss Insurance
There are a variety of reinsurance and stop loss insurance types that are available for insurers. This article will discuss a few of the major types of policies.
Facultative Coverage – This type of coverage is risk-specific. It is a policy that reinsures coverage only for a specific risk, contract, or individual.
Reinsurance Treaty – This type of coverage is for a set period of time instead of for a specific risk.
Proportional Reinsurance – This type of coverage provides the reinsurer a prorated share of all policy premiums sold by the insurer. The reinsurer also bears a pre-negotiated portion of losses.
Non-proportional Reinsurance – This type of coverage only provides support once the insurance company’s losses exceed a specified amount. This amount is known as a retention limit.
Excess-of-Loss Reinsurance – This is a type of non-proportional reinsurance. It is coverage for catastrophic events. It is applied after an insurance company’s retention limit has been exceeded.
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