There
are 2 (two) methods of reinsurance: facultative (arranged per case); and treaty
(arranged in advance with reinsurers to be available automatically to the
ceding office).
Facultative reinsurance
Facultative
reinsurance is the oldest form of reinsurance. Its essential feature is that
each party to the transaction has a free choice in arranging the matter; the
ceding company may offer the risk to any reinsurer on its panel of reinsurers
that it may choose, while the reinsurer is quite free in his choice as to
whether or not he will accept the risk offered. It follows that each risk to be
reinsured has to be dealt with separately and each facultative reinsurance
forms a complete reinsurance contract in itself.
This
method of reinsurance is used where:
- Treaty capacity has been filled;
- The risk is outside the terms of the treaty; and/or
- The risk is of an unusual kind.
Facultative reinsurance is relatively expensive to purchase because of the costs of administration and the fact that the risks offered for facultative cover are likely to be heavier by way of extra hazards and/or will be of higher value. In comparison, the main advantage of treaty business is that the ceding office can give immediate cover to the public, knowing that it has reinsurance cover from the moment it makes a decision regarding the amount of its retention. Immediate decisions cannot be given, however, where the ceding office has to seek facultative cover. Therefore, we will now consider treaty reinsurance.
Treaty
reinsurance
Treaty
reinsurance is an agreement by which one or more reinsurers will automatically
accept all reinsurance which falls within predetermined limits.
Most
treaties are “blind.” This means that the reinsurers are bound to accept risks
without prior knowledge. The reinsurer provides a list of premiums and claims
at regular intervals (the length of interval will depend upon the relationship
between the insurer and reinsurer).
Reinsurers allow a commission which is sufficient to pay the insurer’s expenses (including any agent’s commission), and there is usually provision for sharing in any profits the treaty makes.
Reinsurers allow a commission which is sufficient to pay the insurer’s expenses (including any agent’s commission), and there is usually provision for sharing in any profits the treaty makes.
Because
of the automatic nature of the treaty method, it is common for reinsurers to do
much business only where they are fully satisfied as to the standing and
underwriting record of the direct insurer involved. A safeguard in many
treaties is the reinsurer’s right to inspect the direct insurer’s records of
any claim of risk.
Source:
Peter
Wildman, FCII. 1998. Commercial Property and Pecuniary Insurances – Assessment
and Underwriting. The Chartered Insurance Institute.
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