REINSURANCE
WHAT IS REINSURANCE
• Reinsurance is defined as the act of insuring again by an insurance company.
• A risk that has already been insured by the policyholder to one insurer will be reinsured
to another insurer or reinsurer.
• Reinsurance is a contractual arrangement under which one insurance company, called the
primary insurer, ceding company or reinsured, transfer to another insurance company,
known as the reinsurer.
• Retrocession is when reinsurer may reinsure some of its assumed risks to another
reinsurer.
• The fundamental element in this reinsurance arrangement is the spreading of risk or loss
to as many risk- assuming entities as possible so that the impact of financial losses
arising from risks will be minimal.
• Reinsurance is a mechanism through which the primary insurer or ceding company limits
or restricts its risk or loss exposures assumed form the acceptance of various insurance
policies by transferring the excess of the risk or loss exposures it is unable to keep or
retain in relation to its own financial resources.
REINSURANCE / RETAKAFUL
Risk Insurance / TO Reinsurance Retrocession
Reinsurer
Reinsurer A
A
Reinsurer
Policyholder / Insurance Company / Reinsurer
B
Participant Takaful Operator (TO) B
Reinsurer Reinsurer
C C
Note: reinsurer = retakaful operator
Reinsurer
D
REINSURANCE
Transfer Transfer Transfer
risk to risk to risk to
INSURANCE REINSURANC RETROCESSIO
E N
FUNCTION OF
REINSURANCE
share part of the
Make a
large losses with
huge claim
the reinsurer
FUNCTION OF
REINSURANCE
Offer to insure risk with Can accept the risk,
huge sum insured more retained within their
than insurer capacity limit, transfer the balance
to reinsurer
With reinsurance
Eg: Sum Insured RM Insurer underwriting arrangement, can
2 million capacity only RM 1 transfer another RM1
million, therefore retain million to be covered by
only RM 1 million reinsurer
FUNCTION OF REINSURANCE
Transfer Transfer the risk to
the risk to reinsurer
FUNCTION OF REINSURANCE
TYPES OF REINSURANCE
AUTOMATIC
PROPORTIONAL
REINSURANCE
TYPES OF AUTOMATIC
PROPORTIONAL REINSURANCE
QUOTA SHARE TREATY
60% Quota Share (maximum Maximum Sum
Insured Primary
RM1,000,000 ) insurer + reinsurer
Gross Sum Primary insurer Reinsurer Facultative
Insured (RM) (40%) (60%) (other insurer
400,000 600,000 arrangement)
10,000 4,000 6,000 Nil
600,000 240,000 360,000 Nil
2,000,000 400,000 600,000 1,000,000
10,000,000 400,000 600,000 9,000,000
SURPLUS TREATY The sum insured within
Retention = RM500,000 retention limit will be
retained by primary insurer
1st layer = 10 line surplus – reinsurance arrangement 1
2nd layer = 10 line surplus – reinsurance arrangement 2
Gross Sum Primary insurer First Surplus 10 line Facultative
Insured (RM) (retain: RM 10 line surplus Second
2 Surplus
1
500,000) (RM500,000 x 10 (RM500,000 x 10
=RM5,000,000) =RM5,000,000)
100,000 100,000 Nil Nil Nil
700,000 500,000 200,000 Nil Nil
3,000,000 500,000 2,500,000 Nil Nil
8,000,000 500,000 5,000,000 2,500,000 Nil
12,000,000 500,000 5,000,000 5,000,000 1,500,000
COMBINED QUOTA SHARE
AND SURPLUS TREATY
A reinsurance program is arranged as follow:
▪ First layer – 60% quota share (maximum RM1,800,000)
▪ Second layer – 4 line surplus
Based on the following, calculate the reinsurance allocations between the
cedant/insurer and reinsurer for the risks with the sum insured as shown
below.
i. RM20,000
ii. RM600,000
iii. RM4,000,000
ANSWER FOR COMBINED QUOTA SHARE AND
SURPLUS TREATY
A reinsurance program is arranged as follow:
▪ First layer – 60% quota share (maximum RM1,800,000)
▪ Second layer – 4 line surplus
Based on the following, calculate the reinsurance allocations between the cedant/insurer and reinsurer for the
risks with the sum insured as shown below.
i. RM20,000
ii. RM600,000
iii. RM4,000,000
Sum Insured Insurer (40%) Reinsurer (60%) Surplus
(40% x (60% x (4XRM1,800,0000)
RM1,800,000) RM1,800,000) RM 7,200,000
Max retention RM720,000 RM 1,080,000 >1,800,000
RM20,000 RM8,000 RM12,000 Nil
RM600,000 RM240,000 RM360,000 Nil
RM4,000,000 RM720,000 RM1,080,000 RM2,200,000
RM5,000,000 ? ? ?
RM5,000,000 RM720,000 RM1,080,000 RM3,200,000
SEMI-AUTOMATIC
PROPORTIONAL
REINSURANCE
Only ceding
company have
option to
reinsure or not
NON-AUTOMATIC
PROPORTIONAL
REINSURANCE
Both ceding
company and
reinsurer have
option
RETAKAFUL
RETAKAFUL
• Retakaful is the Islamic form of reinsurance & the methods of retakaful are
very similar to reinsurance methods.
• Retakaful is a transaction whereby one company (the retakaful operator) agrees
to indemnify another takaful operator (the ceding company or cedant) against
all part of the loss that the latter sustains under takaful contracts that it has
issued. For the services rendered, the ceding company pays a contribution to
the retakaful operator.
• With the limited fund, in accepting all takaful risks, TO are allowed to
retakaful to another takaful operators or to conventional reinsurers.
• RETROTAKAFUL
• Referring to the retrocession of retakaful business to other retakaful companies
FUNCTIONS OF RETAKAFUL
• Increase the capacity
• To spread the risk with other operators or retakaful operators
• Profit maximization
• Potential growth in sales
• Bigger market share
• Better management of solvency risks
TYPES OF RETAKAFUL
• Proportional Retakaful
• Automatic proportional retakaful
• Quota Share retakaful
• Surplus retakaful
• Non-automatic proportional retakaful
• Semi-automatic proportional retakaful
TYPES OF RETAKAFUL
• Non-Proportional retakaful (Excess of Loss)
• Similar to reinsurance arrangements which is based on treaty or automatic cover
