Riskonomics, Uncategorized

Types of Reinsurance

Reinsurance coverage can be provided on either a “facultative” or an “obligatory” basis.

Facultative reinsurance is arranged separately for each single risk and the reinsurer has the possibility of accepting or rejecting the risk being offered by the reinsured.  The terms and conditions of the cover will generally follow the original policy.

Under obligatory reinsurance, the coverage provided by the reinsurer is for all policies/risks within a given portfolio.  Its obligatory nature comes from the fact that the reinsurer is not able to reject giving cover on particular risk in the portfolio.  On the other hand, the reinsured cannot exclude certain risks from the reinsurance cover, unless the exclusion has been agreed during negotiation stage prior to reinsurance contract become effective.  The reinsurance furthermore need not necessarily be based on the same terms as the original policies.  Sometimes, original policies have wider coverage than the “obligatory” reinsurance that protects them. In these cases, the reinsured has either to resort to protecting the uncovered part by other reinsurance arrangement or to retain the risk itself.  Obligatory types of reinsurance are better known as “treaty reinsurance”.

There is also a type called facultative/obligatory reinsurance which is a hybrid of the two general types, i.e. facultative and treaty.  It gives the direct insurer the ability to offer the reinsurer certain selected risks which the latter is obliged to accept under the terms and conditions stipulated at the outset of the contract. 

Leaving facultative/obligatory reinsurance aside as a special form, each type can be further split by the method, which is either proportional or non-proportional.  The two types and two methods of reinsurance then give us four combinations:
1. Proportional facultative
2. Non-proportional facultative
3. Proportional treaty
4. Non-proportional treaty

Depending on the size of risk to be ceded, the proportional treaties sector is further split into Quota Share and Surplus treaties.  Meanwhile, the non-proportional sector has two important forms namely Excess of Loss and Stop Loss treaties.
Adopted from Akoob, M. (2008). Reinsurance and Retakaful. In S. Archer, R. Karim, & V. Neinhaus, Takaful and Islamic Insurance: Concept and Regulatory Issues.Singapore: John Wiley & Sons (Pte) Ltd

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