What Is Co-Reinsurance?
Co-reinsurance is a contractual agreement for two or more reinsurance companies to share the fees and the potential costs of the coverage.
Reinsurance companies are contracted by insurance companies to accept part of their costs of claims in major events like a hurricane. Due to the extremely high potential costs of some disasters, reinsurance companies sometimes choose to mitigate their risks by acting together.
- Insurance companies charge premiums in return for covering risks.
- Reinsurance companies take on a share of that risk in return for a portion of the premiums.
- Co-reinsurance policies allow reinsurers to share the risks.
Hurricane Katrina stands as the most costly disaster in U.S. history, causing an estimated $172.5 billion in damage in 2005. Hurricane Harvey, in 2017, was not far behind at $133.8 billion.
The record may fall due to the COVID-19 pandemic, which was projected to cost health insurers up to $547 billion by the end of 2021.
That makes it less surprising that insurance companies offload some portion of their outsized risks to reinsurance companies, which in turn may choose to combine their resources to provide co-reinsurance. The insurance companies pass along part of the premium for the contract to the reinsurers, who divide up the revenue, and the risk, proportionately.
This also effectively reduces the risk to the insured party, since a Katrina-size event could bankrupt a single insurer.
A group of reinsurers participating in a co-reinsurance scheme is sometimes referred to as a pool.
Co-reinsurers are often relatively small companies that could not take on the level of risk that the contract requires.
Types of Co-Reinsurance
Co-reinsurance agreements are typically negotiated between the original insurance company, called the ceding company, and a lead reinsurer. The lead reinsurer makes decisions on behalf of the other reinsurance companies, called follower reinsurers, who are participating in the co-reinsurance contract.
The amount of loss that each reinsurer is responsible for is typically calculated proportionally, with reinsurers who have a larger stake in the contract being responsible for a larger percentage of any claims. In addition to having a proportional stake in any losses, co-reinsurers get a proportional stake in the premiums they receive for taking on the risk.
In some cases, co-reinsurance is not proportional. Under this scenario, the reinsurance companies must pay only if the total claims suffered by the insurer during a predetermined period exceed a certain amount.
This amount is called retention, or priority. There are several different types of non-proportional co-reinsurance, including excess of loss and stop-loss co-reinsurance.
Excess of Loss Co-Reinsurance
Excess of loss reinsurance sets a maximum on the amount of the damages that an insurer must pay before the reinsurer (or co-reinsurers) picks up responsibility.
The insurer is thus indemnified or protected from additional losses.
Stop-loss reinsurance limits an insurance company's liability to a specific percentage of the premium paid. The reinsurance picks up the rest.