Reinsurance 再保險

Definition and the Parties Involved 再保險的定義及各方關係

Reinsurance is an arrangement in which an insurer transfers part (sometimes all) of the risks it has accepted, together with a matching share of the premium, to another insurer. It is often described as "the insurance of insurers". The insurer passing on the risk is the ceding company, and the insurer accepting it is the reinsurer. The part the ceding company keeps for its own account is its retention.

The reinsurance contract exists only between the ceding company and the reinsurer, and both are bound by utmost good faith. The original policyholder is not a party to it and cannot claim directly against the reinsurer. Even if the reinsurer cannot pay, the ceding company must still pay the policyholder in full under the original policy.

A reinsurer may in turn pass part of the risks it has accepted to other reinsurers. This is called retrocession. In Hong Kong an insurer carrying on reinsurance business must also be authorised by the Insurance Authority, and an insurer that carries on reinsurance business only is known as a professional reinsurer.

Purposes of Reinsurance 再保險的作用

Increased underwriting capacity: the ceding company can accept large risks well beyond what its own resources could bear (for example a large factory or infrastructure project), keeping only what it can afford and passing the rest to reinsurers. This also lets smaller or newly formed insurers take part in large risks or enter new classes of business.

Stability of results: a single large claim, or an unusually bad year, can make an insurer's results swing sharply. By transferring part of its losses, reinsurance makes year-to-year results smoother and more predictable.

Catastrophe protection and spread of risk: events such as typhoons, floods or earthquakes can trigger claims on many policies at once, an accumulation of risk. Reinsurance spreads such losses across many local and overseas reinsurers and protects the ceding company's solvency.

Technical support: reinsurers have wide experience across markets and can advise on underwriting, rating, policy wordings and new product design. Remember that reinsurance transfers only the financial burden; it does not transfer the ceding company's legal liability to its policyholders.

Methods of Arrangement: Facultative and Treaty 再保險的安排方式：臨時再保險與合約再保險

Facultative reinsurance: the ceding company offers each risk to the reinsurer individually, with full details of that risk. The ceding company is free to decide whether to cede, and the reinsurer is free to accept or decline. It suits risks that are unusually large, unusual in nature or outside the scope of a treaty, but negotiating each risk takes time, and the ceding company cannot be sure of cover until the reinsurer accepts.

Treaty reinsurance: the ceding company and reinsurer agree a contract in advance, setting out the classes of business, limits and terms. For every risk within its scope the ceding company must cede and the reinsurer must accept, with no risk-by-risk review. It is automatic, simple to administer and gives certainty of cover, so it is the main method insurers use for their everyday volume of business.

There is also a hybrid, facultative obligatory arrangement: the ceding company may choose whether to cede a risk, but once it does, the reinsurer must accept it.

Forms of Reinsurance: Proportional and Non-proportional 再保險的形式：比例與非比例

Proportional reinsurance: the ceding company and reinsurer share sums insured, premiums and claims in the same proportion, and the reinsurer usually pays a reinsurance commission to cover the ceding company's acquisition and administration costs. There are two main types. Under quota share, a fixed percentage of every risk is ceded, for example 60% ceded and 40% retained. Under surplus, the ceding company sets a retention (one "line") and cedes only the amount above it, up to a stated number of lines, so the proportion ceded varies from risk to risk with the sum insured.

Surplus example: with a retention of HK$2 million, a risk insured for HK$8 million is 25% retained and 75% ceded. A later loss of HK$400,000 is shared 25%/75% in the same way, even though the loss is below the retention.

Non-proportional reinsurance: sharing is based on the size of the loss, not on the sum insured. Under excess of loss, the reinsurer pays the part of a loss above an agreed amount (the ceding company's retention), up to an agreed limit, either per risk or per event (catastrophe cover). Under stop loss, the reinsurer protects the ceding company's overall loss ratio for a class over a year, for example paying the part of the loss ratio above 70% up to an agreed limit. The premium for non-proportional cover is negotiated separately rather than being a share of the original premium.