By covering the insurer against cumulative individual obligations, reinsurance gives the insurer more security for its own capital and solvency by increasing its ability to withstand the financial burden in the event of unusual and major events. Many reinsurance investments are not placed with a single reinsurer, but are divided by a number of reinsurers. For example, a surplus of $30,000,000 can be shared by 30 or more reinsurers. The reinsurer that sets the terms (premium and contract terms) of the reinsurance contract is designated as lead reinourer; other companies that enter into the contract are designated by reinsurer. In addition, a reinsurer may accept the entire reinsurance and retroactively pass it on to other companies (in another reinsurance agreement). In the case of non-proportional reinsurance, the reinsurer is liable if the insurer`s losses exceed a certain amount designated as a priority or retention limit. As a result, the reinsurer does not have a proportionate share of the insurer`s premiums and losses. The priority or retention limit is based on a type of risk or a whole category of risk. Reinsurance is also known as insurer insurance or stop-loss insurance.
Reinsurance is the practice in which insurers transfer part of their risk portfolios to other parties through some agreement, in order to reduce the likelihood that a significant commitment will result from a right to insurance. In the case of proportional reinsurance, one or more reinsurers receive a reported percentage of each policy issued by an insurer (“written”). The reinsurer then receives this indicated percentage of premiums and pays the specified percentage of the receivables. In addition, the reinsurer will authorize a “forfeiture fee” to the insurer to cover the costs of the ceding insurer (mainly the acquisition and management, as well as the expected profits that the assignor abandons). In the context of risk reinsurance, all claims found during the actual period are covered, regardless of whether the losses occurred outside the period covered. There is no coverage for rights outside the period covered, even if the losses occurred during the duration of the contract. By choosing a particular type of reinsurance method, the insurance company may be able to create a more balanced and homogeneous portfolio of insured risks. This would make the results more predictable on a net basis (i.e.: