Proportional Reinsurance Agreements
In such agreements, the insurance premium and claims are shared between the insurance company and the reinsurer at a certain rate. As a result, the profit or loss of the insurer and the reinsurer from the transferred risks will be similar. The main types are Surplus agreements and Quota share.
In Quota Share Reinsurance Treaty agreements, the insurance company transfers a pre-agreed premium to the reinsurer on each policy it produces. On the other hand, the reinsurer contributes the same amount to all the claims related to these policies. In Quota Share agreements, the profit/loss situation of the insurer and the reinsurer process parallel to each other.
In Surplus Reinsurance Treaty agreements, a fixed amount is determined as the retention of the insurance company. Premiums exceeding this amount are transferred to the reinsurer. The biggest difference between surplus agreements and fixed share agreements is that the premium rate transferred to the reinsurer can vary from policy to policy. In such agreements, an upper limit is determined, which is usually expressed as a certain multiple of the retention rate. Damages exceeding this limit are not covered under the agreement.
Non-proportional Reinsurance Agreements
In such agreements, if the loss of the insurer exceeds a certain amount, the reinsurer is only obliged to pay the excess. There is no proportional connection between the damage paid to the insurer and the premium ceded to the reinsurer.
Non-proportional agreements are often used in conjunction with proportional agreements. The purpose of these agreements is to protect the retention that remains with the insurer after proportional agreements. For example, in an earthquake disaster, many policies will be damaged, so the insurer will have to pay claims for a large number of policies that remain in its retention. Even if the insurer has made a proportional reinsurance agreement, it may not be able to pay the total damage that will result from the combination of many retention policies. In this case, non-proportional agreements become involved and reduce the liability of the insurer.
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The main types of non-proportional agreements are Excess of Loss and Stop Loss:
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Excess of loss agreements, come into effect in case of exceeding the retention number that occurs as a result of certain damages such as an accident, earthquake, or flood for the exceeding part. These agreements have a fixed upper limit. In addition, agreements may impose a limit on the number of events that will occur in a given year.
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Stop Loss agreements, come into effect in case of exceeding the retention number by a certain amount within a year regardless of the number of events. After this point, the retention number of the damages will be under the responsibility of the reinsurer until the agreement limit is reached.
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When it is necessary to issue policies with large amounts exceeding the upper limits of reinsurance agreements, insurance companies make request for facultative reinsurance.
Facultative Reinsurance
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It is the situation in that insurance companies choose to make a request to the reinsurer on a basis of risks. It is generally used for very large risks that exceed the upper of the reinsurance treaties. These risks are insured on a piece-by-piece basis. Reinsurers often request detailed information and documents about risk from the insurance company for facultative reinsurance. Reinsurance specialist examine these information and decide on risk acceptance in reinsurance companies.