What This Assignment Covers
Reinsurance is insurance for insurance companies. When a primary insurer writes a policy that is too large or too risky to handle alone, it transfers some of that risk to a reinsurer. This allows insurers to write bigger policies, survive catastrophes, and keep their financial statements healthy. Without reinsurance, the entire insurance industry would be far smaller and less stable. This assignment covers how reinsurance works, the different types of agreements, and how capital markets are creating new alternatives to traditional reinsurance.
Exam Alert
The exam heavily tests the six functions of reinsurance, the difference between treaty and facultative reinsurance, and the difference between pro rata (proportional) and excess of loss (non-proportional) agreements. You must also know quota share vs. surplus share and be able to calculate how premiums and losses are split. Catastrophe bonds and alternative capital are growing in exam importance.
After this assignment, you will be able to:
Explain what reinsurance is, identify its key terminology (ceding company, reinsurer, retrocession, cession), describe the six functions reinsurance serves, and distinguish between its three sources
Compare pro rata (proportional) and excess of loss (non-proportional) reinsurance, distinguish quota share from surplus share, calculate premium and loss splits, and explain how insurers layer multiple types of reinsurance into a program
Describe capital market alternatives to traditional reinsurance including catastrophe bonds, sidecars, ILWs, and collateralized reinsurance, and explain modern trends reshaping the reinsurance market
Assignment Parts
Reinsurance Functions and Sources
What reinsurance is, key terminology, the six functions it serves, three sources of reinsurance, and treaty vs. facultative agreements.
Types of Reinsurance Agreements
Pro rata (quota share, surplus share) vs. excess of loss (per risk, per occurrence, aggregate). Worked examples with dollar amounts.
Capital Market Alternatives and Modern Reinsurance
Catastrophe bonds, sidecars, ILWs, collateralized reinsurance, finite risk, and modern trends reshaping the reinsurance landscape.
Quick Reference: Reinsurance at a Glance
6 Functions
Capacity, catastrophe protection, stabilization, surplus relief, withdrawal, underwriting guidance
2 Main Categories
Pro rata (proportional) shares premiums AND losses; Excess of loss (non-proportional) only pays above a threshold
Treaty vs. Facultative
Treaty = blanket/automatic; Facultative = individual risk, negotiated one at a time
Capital Market Alternatives
Cat bonds, sidecars, ILWs, collateralized reinsurance — now ~20% of global capacity