Insurance Reinsurance Terms & Definitions
Insurance Reinsurance Terms Glossary. Typically, insurers protect themselves against catastrophic losses by transferring a portion of the risk they have assumed to other parties (typically other insurance companies).
This practice is called reinsurance and simply means to insure again. Reinsurance enables insurers to offer larger amounts of insurance than they would otherwise be able to write, and also permits them to stabilize their operations by divesting themselves of risks that would likely pose problems.
Reinsurance also permits insurers to create more flexibility in the types of business they write.
The insurance company that undertakes to protect the insured directly is the ceding carrier, so called because it gives up (cedes) a portion of its risk to another carrier - known as the assuming carrier. The assuming carrier receives a premium from the ceding carrier for reinsuring part of the risk.
Reinsurance is purchased from specialized reinsurance (excess) companies or from large companies that, typically, transact insurance business with the general public as well as reinsure other insurance carriers. Coverage may be purchased on either an individual contract (facultative) or on a group basis (treaty).
When an insured incurs a loss, that insured looks to the company that issued the policy for recovery. The insured has no involvement in the reinsurance arrangement between the underwriters and insurance carriers (that is the case for treaty insurance).
When the insured has been paid, the ceding carrier turns to the assuming carrier for reimbursement, according to the terms of the reinsurance contract between them. Of course, there are times when companies disagree with precisely what is eligible for coverage.
The Insurance Reinsurance Terms Glossary should help you with some of the jargon and legal ease used in the reinsurance.
Read the Insurance Reinsurance Terms Glossary to better understand business insurance policy language and to see how the courts interpret coverage, exclusions, or other policy provisions.
Insurance Reinsurance Terms Glossary And Definitions
The following terms are widely accepted and are frequently used to describe reinsurance in its different forms - alphabetically organized.
Automatic Treaty - A reinsurance treaty under which the ceding company must cede and which the reinsurer must accept, in accordance with the terms of the treaty (see above example).
Catastrophe Reinsurance - A form of reinsurance that indemnifies the ceding company for the accumulation of losses in excess of a stipulated sum and arising from a catastrophic event.
Cede - When an insurer reinsures its liability with another, it "cedes" business. To effect reinsurance.
Ceding Company - The original or primary insurer. The insurance company which purchases reinsurance.
Cession - 1) A reinsurance. 2) An amount ceded as reinsurance.
Excess Of Loss Reinsurance - A form of reinsurance which indemnifies the ceding company for that portion of the loss which exceeds the limit of its own retention.
Facultative Reinsurance - Reinsurance of individual exposures. Under this arrangement, the reinsurer may accept or reject each risk offered by a ceding company.
Facultative Obligatory Treaty - A reinsurance treaty under which the ceding company may cede identified exposures, but which the reinsurer must accept if offered. The terms of the treaty apply.
Facultative Treaty - A reinsurance treaty under which the ceding company may cede identified exposures, and which the reinsurer may accept or reject. The terms of the treaty apply if the reinsurance is accepted.
First Surplus Treaty - A form of reinsurance under which the reinsurer shares the risk with the ceding company on a pro rata basis, the proportion being either fixed or varied according to different classes of exposures and to the amount the ceding company retains for its own account.
Pool - An arrangement among a number of insurers or reinsurers who agree to place all business in a certain class (or a portion of it) in a common central association and to divide that business, premiums, losses, expenses and profits, in agreed proportions.
Quota Share Reinsurance - The basic form of automatic treaty whereby the reinsurer accepts a stated percentage of each exposure written by the ceding company on a defined class of business.
Retention - The part of the insurance on an exposure retained by the ceding company for its own account, the excess being reinsured.
Retrocession - A cession of reinsurance by one reinsurer to another.
Spread Loss Reinsurance - A form of excess of loss reinsurance under which each year's rate is determined from the ceding company's excess losses for a specified number of prior years.
Stop Loss Reinsurance - A form of reinsurance under which the reinsurer reimburses the ceding company for any amount by which incurred losses during the calendar year for a specified class of business exceed a stated loss ratio.
Surplus Reinsurance - Reinsurance of amounts over an amount retained by the ceding company, with the reinsurer contributing to the payment of losses in proportion to its share of the total limit of coverage.
Treaty - A contract between the ceding company and reinsurer that explains the conditions for reinsuring a class or classes of business, in contrast to a reinsurance agreement applicable to a single exposure. There are two broad types of treaty reinsurance:
- Excess cover, whereby the reinsurer is liable only for such portion of any loss as exceeds a stated amount or a stated percentage. The ceding insurer pays all losses up to that amount.
- Quota share, whereby the assuming company accepts a fixed percentage of every risk underwritten by the ceding carrier and, regardless of the size of the loss, pays the stipulated percentage.
Insurance Reinsurance Terms Glossary - The Bottom Line
We hope that the Insurance Reinsurance Terms Glossary helps you to better understand the many legal terms used in and around reinsurance contracts and treaties.
To find out what types of coverage your business needs, speak to a professional insurance broker with experience in insuring businesses like yours.
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