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