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Reinsurance is insurance for insurance companies. This is used to diversify claim cost and risks, and to protect from catastrophic loss.
Reinsurance could be categorized into facultative/ treaty reinsurance and its sub-category of loss sharing, proportional/ non-proportional reinsurance. Each type are mutually exclusive within each category; for instance, a reinsurance could not be faculatative and treaty reinsurance at the same time or proportional and non-proportional reinsurance at the same time. However, reinsurance could be facultative and proportional reinsurance or treaty and non-proportional reinsurance.
Facultative reinsurance : Facultative reinsurance covers specific exposures, and transfer risks case-by-case. Therefore, this is a more expensive option.
Treaty reinsurance : Treaty reinsurance covers a group of exposures and entire portfolio. This requires both parties to agree on all risks covered in the policy.
Proportional reinsurance : In proportional reinsurance, reinsurer pays a percentage of risk. This type of reinsurance could be identified as quota-share or surplus-share reinsurance.
Quota-share : Reinsurer pays a fixed percentage for all policy loss up to a maximum limit.
Surplus-share : Reinsurer pays a percentage of the policy loss up to a maximum limit only if the policy is above a line (deductible amount). A different percentage is calculated for each of the policies by weighting each of the policy value to the line (deductible amount). For example, policy value = 1000, line = 250, loss = 200. The coverage % = 250/1000 = 25%. Reinsurer pays 200*25% = 50.
Non-proportional reinsurance : In non-proportional reinsurance, reinsurer pays the dollar amount above a certain level. This type of reinsurance could be identified as excess-of-loss or stop-loss reinsurance.
Excess-of-loss : Reinsurer pays all of the policy loss above a given base amount (deductible amount) up to a maximum limit.
Stop-loss : Reinsurer pays the excess policy loss of deductible on total annual loss.
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