If an insurer starts reinsuring, it places part of the risks with another insurer: the reinsurer. A distinction is made here between proportional reinsurance (such as ‘quota share’ and ‘surplus’) and non-proportional variants (which include ‘stop loss,’ ‘excess,’ and ‘aggregate XL’).

Okay, so why a reinsurer?

Here’s the thing: a policyholder takes out insurance with an insurance company. This creates the inevitable risk for the insurance company that it will have to pay an amount to the policyholder in the event of damage. Small amounts are fine, but it can run high on the papers when everything is put together. By reinsuring itself, the insurer transfers the financial consequences to another insurer: the reinsurer. This not only allows the insurer to take out higher insured amounts, but reinsurance also prevents large fluctuations in its annual figures. 

Prefer less risk

There are certain risks you would rather not bear alone. This applies to private individuals but certainly also to insurers. If an insurance company chooses to bear all risks, this could mean bankruptcy in the worst case. Even if an insurer has a (very) large buffer, reinsurance can still be a good idea. You also pay costs for such a buffer, which can easily exceed the costs of a reinsurance premium. Reinsurers also often provide a source of data and knowledge that the insurer can use for expansion or product development. 

Tailor-made reinsurance

Every insurer has its own goals and reasons for wanting to take out reinsurance. Reinsurers offer tailor-made solutions for this. 

Although reinsurers are occasionally tempted to use hip terminology, reinsurance can be roughly divided into a few categories:

Quota share

In a quota share reinsurance contract, there is a split between the reinsurance and the insurer’s retention. For example, suppose an insurer chooses to insure 75 percent of the risk associated with the launch of a new product. In that case, the gross reinsurance premium is also 75 percent, and three-quarters of the claims can be passed on to the reinsurer. 

Since one large claim quickly exceeds the total premium, a quota share for smaller insurers is most effective in limiting volatility (= a fancy word for ‘fluctuation of a price’).

Surplus

While smaller insurance companies with equally small portfolios often prefer quota share reinsurance, the larger parties prefer the surplus variant. Both involve proportional reinsurance (where a fixed percentage is considered), but surplus reinsurance goes one step further. The largest percentage is always reinsured with a surplus contract, but a certain amount is taken out for each property or policy. The following applies: the larger the amount for your account, the more can be reinsured.

Surplus reinsurance is often a good choice if an insurer with an extensive portfolio wants to limit claims volatility. 

Stop loss

Stop loss reinsurance is also particularly recommended for larger portfolios. The insurer limits its losses when a certain limit is reached. The amount of the total claims incurred by the insurer led to this. The reinsurer will reimburse the remainder if this amount exceeds the set limit of the annual premium earned. With this stop loss reinsurance, the insurer has to be patient: only after the end of an insurance year is it known what the total claims will be and what the reinsurer must pay out. But as they say, patience pays off. 

Excess

With an excess (also called loss or excess-of-loss) reinsurance, just like with the stop-loss variant, it is about an agreed limit. Up to this limit, the insurer bears the costs; above that, the reinsurer reimburses amounts up to an agreed maximum. Two forms can be distinguished here, the first of which is defined as ‘per event cover.’ In this case, the compensation from the reinsurer is based on the loss that has arisen due to an event, such as a severe storm. The second form is called ‘per-risk cover’ and looks at all individual claims. 

And then we have arrived at the last – with the hippest name –: the aggregate XL reinsurance. You can think of this reinsurance as a kind of ‘collection box’ in which all losses are collected and added up. As soon as this box overflows, the reinsurer will pay out. The insurer again determines which losses qualify for this; often, it concerns a combination of the previously mentioned ‘per event’ and ‘per risk’ losses. 

Finally

Well, a lot of information has been poured out on you in the last few paragraphs – hopefully, it has made you a little wiser. In conclusion, we would like to emphasize that the mentioned coverages do not have to stand alone but can also be combined. Reinsurers can help you with the right tailor-made package. Do not be too distracted by the abundance of hip terminology: all reinsurance can be traced back to the overview above. Good luck.