Reinsurance Essay

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REINSURANCE Reinsurance is insurance that is purchased by an insurance company (the cedent) from one or more other insurance companies (the "reinsurer") as a means of risk management. The ceding company and the reinsurer enter into a reinsurance agreement which contains the conditions upon which the reinsurer would pay a share of the claims incurred by the ceding company. The reinsurer is paid a "reinsurance premium" by the ceding company, which issues insurance policies to its own policyholders. The reinsurer may be either a specialist reinsurance company, which only undertakes reinsurance business, or another insurance company. There are two basic methods of reinsurance: 1. Facultative Reinsurance, which is negotiated separately for each insurance contract that is reinsured. Facultative reinsurance is normally purchased by ceding companies for individual risks not covered, or insufficiently covered, by their reinsurance treaties, for amounts in excess of the monetary limits of their reinsurance treaties and for unusual risks. Facultative reinsurance is commonly used for large or unusual risks that do not fit within standard reinsurance treaties due to their exclusions. 2. Treaty Reinsurance means that the ceding company and the reinsurer negotiate and execute a reinsurance contract. The reinsurer then covers the specified share of all the insurance policies issued by the ceding company which come within the scope of that contract. The reinsurance contract may oblige the reinsurer to accept reinsurance of all contracts within the scope (known as "obligatory" reinsurance), or it may require the insurer to give the reinsurer the option to reinsure each such contract. There are two main types of treaty reinsurance: • Proportional reinsurance: the reinsurer's share of the risk is defined for each separate policy. Under proportional reinsurance, one or more

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