Section 8 : Reinsurance

Question 1

Contrast a treaty reinsurance arrangement with a facultative reinsurance arrangement.

Answer 1

Treaty reinsurance – any two of the following are acceptable:
* ceded LOBs are agreed in advance
* all business falling under contract is automatically insured
* involves ongoing relationship between primary insurer and reinsurer
* commonly used for a group of homogeneous risks

Facultative reinsurance – any two of the following are acceptable:
* non-obligatory
* individual underlying insurance contracts (risks) are ceded
* reinsurer underwrites each contract separately
* primary insurer chooses which contracts to submit reinsurer can accept or reject submissions
* commonly used for heterogeneous risks with large limits

Question 2

What is the difference between proportional and non-proportional reinsurance?

Answer 2

Proportional: Premium and losses are shared between insurer and reinsurer in a fixed ratio (e.g., quota share).

Non-Proportional: Reinsurer covers losses only after a certain threshold (e.g., excess of loss).