What Is Co-Reinsurance?
Co-reinsurance is a contractual agreement for at least two reinsurance companies to share the fees and the possible costs of the coverage.
Reinsurance companies are contracted by insurance companies to acknowledge part of their costs of claims in major events like a hurricane. Due to the very high expected costs of certain disasters, reinsurance companies once in a while decide to moderate their risks by acting together.
- Insurance companies charge premiums in return for covering risks.
- Reinsurance companies take on a share of that risk in return for a portion of the premiums.
- Co-reinsurance policies permit reinsurers to share the risks.
Hurricane Katrina remains as the most costly disaster in U.S. history, causing an estimated $172.5 billion in damage in 2005. Hurricane Harvey, in 2017, was not a long ways behind at $133.8 billion.
The record might fall due to the COVID-19 pandemic, which was projected to cost wellbeing insurers up to $547 billion toward the finish of 2021.
That makes it less astonishing that insurance companies offload some portion of their outsized risks to reinsurance companies, which thusly may decide to combine their resources to give co-reinsurance. The insurance companies pass along part of the premium for the contract to the reinsurers, who split the revenue, and the risk, proportionately.
This likewise really reduces the risk to the insured party, since a Katrina-size event could bankrupt a single insurer.
A group of reinsurers participating in a co-reinsurance scheme is at times alluded to as a pool.
Co-reinsurers are much of the time moderately small companies that could not assume the level of risk that the contract requires.
Types of Co-Reinsurance
Co-reinsurance agreements are normally negotiated between the original insurance company, called the ceding company, and a lead reinsurer. The lead reinsurer settles on choices for the other reinsurance companies, called devotee reinsurers, who are participating in the co-reinsurance contract.
The amount of loss that each reinsurer is responsible for is regularly calculated proportionally, with reinsurers who have a bigger stake in the contract being responsible for a bigger percentage of any claims. As well as having a proportional stake in any losses, co-reinsurers get a proportional stake in the premiums they receive for facing the risk.
Now and again, co-reinsurance isn't proportional. Under this scenario, the reinsurance companies must pay provided that the total claims endured by the insurer during a foreordained period surpass a certain amount.
This amount is called retention, or priority. There are several distinct types of non-proportional co-reinsurance, including excess of loss and stop-loss co-reinsurance.
Excess of Loss Co-Reinsurance
Excess of loss reinsurance sets a maximum on the amount of the damages that an insurer must pay before the reinsurer (or co-reinsurers) picks up responsibility.
The insurer is consequently repaid or protected from extra losses.
Stop-loss reinsurance limits an insurance company's liability to a specific percentage of the premium paid. The reinsurance picks up the rest.