A cedent is a party in an insurance contract who passes financial obligation for certain potential losses to the insurer. In return for bearing a particular risk of loss, the cedent pays an insurance premium. The term cedent is most often used in the reinsurance industry, although the term could apply to any insured party.
Breaking Down Cedent
Insurance firms are vulnerable to unforeseen losses due to excessive exposure to high-risk entities. A reinsurer provides the cedent company with multiple reductions in liability and protection against big losses. The transmission of all or some risks to the reinsurance company helps the cedent company maintain its solvency margin while enhancing underwriting capacity by reducing the associated costs, etc.
Insurance companies are regulated so that they may not write policies in excess of a certain percentage of their collateral. However, insurance companies do not have to hold collateral against policies that are reinsured.
Reinsurance Available to Prospective Cedents
Most insurance companies cede some of their risks in a reinsurance program in order to manage their operations more efficiently.
- Facultative reinsurance coverage protects a cedent insurance company for a certain individual or a specified risk or contract. If several risks or contracts need facultative reinsurance, each is negotiated separately. The reinsurer has all rights to accept or deny a facultative reinsurance proposal.
- A reinsurance treaty is effective for a set time period rather than on a per-risk or contract basis. The reinsurer covers all or a portion of the risks that a cedent insurance company may incur.
- Under proportional reinsurance, the reinsurer receives a prorated share of all policy premiums sold by the cedent. When claims are made, the reinsurer covers a portion of the losses based on a pre-negotiated percentage. The reinsurer also reimburses the cedent for processing, business acquisition, and writing costs.
- With non-proportional reinsurance, the reinsurer is liable if the cedent's losses exceed a specified amount, known as the priority or retention limit. As a result, the reinsurer does not have a proportional share in the ceding insurer's premiums and losses. The priority or retention limit may be based on one type of risk or an entire risk category.
- Excess-of-loss reinsurance is a type of non-proportional coverage in which the reinsurer covers the losses exceeding the ceding insurer's retained limit. This contract is typically applied to catastrophic events, covering the cedent either on a per-occurrence basis or for the cumulative losses within a set time period.
- Under risk-attaching reinsurance, all claims established during the effective period are covered, regardless of whether the losses occurred outside the coverage period. No coverage is provided for claims originating outside the coverage period, even if the losses occurred while the contract was in effect.