What Is Reinsurance Ceded
Reinsurance ceded is the portion of risk that a primary insurer passes to a reinsurer. Reinsurance ceded allows the primary insurer (the ceding company) to reduce its risk exposure to an insurance policy it has underwritten by passing that risk to another company (the accepting company). The accepting company receives a premium for taking on the risk. The accepting company pays a commission to the ceding company on the reinsurance ceded, and the ceding company can recover part of any claim from the accepting company.
Reinsurance Ceded Explained
By ceding a portion of its risk, an insurance company reduces its overall risk exposure. Reinsurance can be written by a specialist reinsurance company, such as Lloyd’s of London or Swiss Re, by another insurance company, or by an in-house reinsurance department.
Some reinsurance can be handled internally—automobile insurance, for example—by diversifying the types of clients that are taken on. In other cases, such as liability insurance for a large international business, a specialty reinsurer might be necessary because diversification is not possible.
An insurer may multiply the ceding and reinsurance process to create a portfolio that can maintain a level of claims that is below the premiums and investment income the insurer generates.
The agreement between the ceding company and accepting company is called the reinsurance contract, and it covers all terms related to the ceded risk. The contract outlines the conditions under which the reinsurance company will pay claims.
There are two types of reinsurance contracts used for reinsurance ceding. In a facultative reinsurance contract, the insurer passes one type of risk to the reinsurer, which means that each type of risk passed to the reinsurer in exchange for a premium is negotiated individually. In a treaty reinsurance contract, the ceding company and accepting company agree on a broad set of insurance transactions that will be covered by reinsurance. For example, the ceding insurance company may cede all risk for flood damage, and the accepting company may accept all risk for flood damage in a particular geographic area such as a floodplain.
- By ceding reinsurance, an insurance company can reduce the risk of its portfolio.
- Facultative reinsurance and treaty reinsurance are the two types of reinsurance contracts.
- Reinsurance is a way for insurance companies to withstand a broader range of risks and to keep premium levels lower.
The Benefits of Reinsurance Ceded
Reinsurance ceded gives the ceding insurer more security for its equity and solvency and more stability when unusual or major events occur. Reinsurance also allows an insurer the freedom to underwrite policies that cover a larger volume of risks without excessively raising the costs of covering their solvency margins or the amount at which the assets of the insurance company, at fair values, exceed its liabilities and other comparable commitments. Reinsurance makes substantial liquid assets available for insurers in case of exceptional losses.
Fast Fact: According to Statista.com, Munich Re was the largest reinsurer worldwide, or recipient of ceded insurance, in 2017, when the company had net premiums of approximately $36 billion; the National Indemnity Company, a subsidiary of Berkshire Hathaway Inc., boasted the largest net premiums earned for reinsurance with net premiums of approximately $21.7 billion.