In simple, reinsurance is insurance for insurers. It is a risk mechanism tool used by an insurance company to increase its underwriting capacity and protect it from any large and complex losses.
In other words, when insurers cannot retain risks, they reinsure to reduce their risks accumulation.
Moreover, reinsurance also provides technical support to an insurer to keep up with demand for a wide range of insurance requirements in a volatile and unpredictable world.
But despite, being crucial in risk and capital management, not much is known about reinsurance outside the insurance sector. Yet, reinsurance remains the lynchpin cog in an insurance system.
The Treaty Reinsurance is an agreement between the ceding and the reinsurance companies.
It is also known as a reinsurance contract where the reinsurer provides their share to cover a specific portfolio of risks underwritten by an insurer.
The reinsurance company is obliged to accept all contracts within the scope of treaty terms and conditions.
The Treaty Reinsurance helps create automatic capacity for an insurance company to underwrite a risk at any given time.
Facultative Reinsurance is a single risk basis negotiation between the ceding company and the reinsurer for the placement of each risk.
The reinsurer has the right to either accept or decline the risk and are not obligated to accept it.
Facultative Reinsurance is executed when the insured’s automatic capacity is exhausted, which could also refer to its retention limit or underwriting capacity.
