Reinsurance involves insurers transferring portions of risk portfolios to other insurers through agreements to reduce the likelihood of paying out large insurance claims. This allows insurers to remain solvent by recovering amounts paid to claimants. It also increases insurers' underwriting capacity and provides catastrophe protection from large losses. There are different types of reinsurance treaties like proportional, non-proportional, and excess loss. Reinsurance risk refers to the risk that a ceding insurer is unable to obtain reinsurance at the right time or cost, and includes residual insurance risk, legal risks, counterparty risk, liquidity risk, and operational risk.

1. Reinsurance

2. Meaning
• Reinsurance, also known as insurance for insurers or stop-loss insurance, is the
practice of insurers transferring portions of risk portfolios to other parties by
some form of agreement to reduce the likelihood of paying a large obligation
resulting from an insurance claim. The party that diversifies its insurance portfolio
is known as the ceding party. The party that accepts a portion of the potential
obligation in exchange for a share of the insurance premium is known as the
reinsurer.

3. Contd
• Reinsurance allows insurers to remain solvent by recovering some or all of
amounts paid to claimants. Reinsurance reduces net liability on individual
risks and catastrophe protection from large or multiple losses. It also
provides ceding companies the capacity to increase their underwriting
capabilities in terms of the number and size of risks.

4. Risk
• Reinsurance means insuring again by the insurer of a risk already insured. Every
insurer has a limit to the risk that he can bear. If at anytime a profitable venture
comes his way, he may insure it even if the risk involved is beyond his capacity
which is his retention limit. In such cases, in order to safeguard his interest, he may
reinsure the same risk for an amount in excess of his retention limit with other
insurers, so that the loss due to risk is spread over many insurers
• Reinsurance risk refers to the inability of the ceding company or the primary insurer
to obtain insurance from a reinsurer at the right time and at an appropriate cost.
The inability may emanate from a variety of reasons like unfavourable market
conditions, etc. Default risk by a reinsurer also affects the ceding insurance company
in an adverse manner as it may affect their profitability.

5. Types
• Treaty vs Facultative
• Proportional vs Excess
• Forms of pro-rata: Quota share vs Surplus share
• Forms of excess loss of reinsurance: per risk, per occurrence cover, working
layer, clash covers, catastrophe cover, aggregate excess

6. Nature of Reinsurance Risk
• Residual Insurance Risk
• Legal Risks
• Counterparty Risk
• Liquidity Risk
• Operational Risk