Reinsurance and risk transfer
This domain tests reinsurance structures, pricing, risk-transfer assessment, collateral and the regulatory framework for cessions.
Structures
Proportional reinsurance shares premium and losses. Quota share cedes a fixed percentage; surplus cedes amounts above a retention in lines. Non-proportional covers apply above a retention: per-risk excess of loss, per-event cat excess of loss, aggregate excess of loss and stop loss. Facultative reinsurance is deal-by-deal; treaty reinsurance is automatic within scope. Reinstatements restore cover after a loss, usually for additional premium. Ceding commission compensates the cedant for acquisition costs.
Worked example
A surplus treaty has retention INR 20 crore and four lines, giving capacity INR 100 crore. A policy with sum insured INR 100 crore is ceded 80% and retained 20%. A loss of INR 50 crore is paid 40 crore by reinsurers and 10 crore by the insurer. If the treaty had only two lines, capacity would be INR 60 crore and the insurer would need facultative cover for the top INR 40 crore.
Traps
Lines are multiples of retention, not percentages. Reinstatement premium and aggregate limits change the net cost. Ceding commission affects the economics but not the gross cession percentage. Risk-transfer testing matters for accounting and capital relief. Do not assume a treaty covers every risk automatically.