What is Co-Reinsurance
Co-reinsurance is the term used when multiple reinsurance companies participate in a reinsurance contract. Reinsurance companies may act together in this way to ensure that the amount of risk being taken over from the insurer can be covered. Companies may also participate in co-reinsurance for tax mitigation purposes. Co-reinsurance may exist in both facultative reinsurance and treaty reinsurance.
BREAKING DOWN Co-Reinsurance
Insurance companies work with reinsurance companies, or with other insurance companies that offer reinsurance, in order to reduce their risk exposure. This risk reduction is accomplished by shifting some or all of the risk that the insurer has taken on by underwriting policies to the reinsurer, who in exchange for indemnifying the insurer is given some of the insurance premiums that the insurer collects.
In some cases, multiple reinsurance companies will participate in the reinsurance contract. Companies may participate in reinsurance to ensure that the amount of risk that is being taken over from the insurer can be covered, as multiple reinsurers dividing up the total risk can reduce the chance that the insurer’s liabilities won’t be covered due to a single reinsurer becoming insolvent.
Co-reinsurers are often small reinsurance companies that may not otherwise be able to work with a ceding company because they cannot take on as much risk as the contract requires. They may also be less familiar with a particular type of risk, and thus are less willing to take on a large amount of that risk until they are more experienced. A group of reinsurers participating in a co-reinsurance scheme is sometimes referred to as a pool.
Different types of co-reinsurance
Co-reinsurance agreements are typically negotiated between the ceding company and a lead reinsurer. The lead reinsurer makes decisions on behalf of the other reinsurance companies, called follower reinsurers, participating in the co-reinsurance contract. The amount of loss that each reinsurer is responsible for is typically calculated proportionally, with reinsurers with a larger stake in the contract being responsible for more of the claims. In addition to having a proportional stake in any losses, co-reinsurers also have a proportional stake in the amount of premiums that they receive for taking on the risk.
In some cases, however, co-reinsurance is non-proportional. Under this scenario, the reinsurance companies pay out only if the total claims suffered by the insurer during a predetermined period exceed a certain amount. This amount is called the retention, or priority. There are several different types of non-proportional co-reinsurance, including excess of loss and stop loss.