Unverified Domain 4: Reinsurance
Official domain names are unverified; this section covers reinsurance, a core insurance operations function. ### Reinsurance basics Reinsurance transfers risk from a ceding insurer to a reinsurer. It stabilizes losses, increases capacity, and protects solvency. Treaty reinsurance covers a defined book automatically; facultative reinsurance is negotiated per risk. Pro rata forms (quota share, surplus share) share premium and losses proportionally. Excess of loss forms cover losses above a retention, either per risk, per occurrence, or in the aggregate. Reinsurance accounting includes ceding commission, reinsurance premium, recoverables, and collateral or credit for reinsurance. ### Worked example An insurer retains $10 million per risk and buys a $15 million excess of loss treaty. It writes a $25 million policy. A $20 million loss occurs. The insurer pays the $10 million retention; the reinsurer pays $10 million under the $15 million layer. The reasoning: the retention is the insurer's first loss; the treaty responds only above it, up to the limit. ### Traps Candidates confuse pro rata with excess of loss, ignore reinstatement provisions, or assume reinsurance transfers all risk. Another trap is forgetting ceding commission in accounting. ### Key points - Reinsurance stabilizes losses and adds capacity. - Treaty is automatic; facultative is per risk. - Pro rata shares premium and loss proportionally. - Excess of loss responds above a retention. - Account for ceding commission and recoverables.