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 onto another company (the accepting company), with the accepting company receiving 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.
BREAKING DOWN Reinsurance Ceded
Being able to cede a portion of its risk allows an insurance company to manage 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, such as with automobile insurance, by diversifying the types of clients that are taken on. In other cases, such as liability insurance for a large international business, specialty reinsurers may be used because diversification is not possible.
The agreement between the ceding company and accepting company is called the reinsurance contract, and it covers all terms related to the risk being ceded. The contract outlines the conditions in which the reinsurance company will pay claims. There are two types of reinsurance contracts used in reinsurance ceding. In a facultative reinsurance contract, the insurer passes one type of risk to the reinsurer, meaning that each type of risk that is passed to the reinsurer in exchange for a premium has to be 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.
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 by which the assets of the insurance company, at fair values, are considered to exceed its liabilities and other comparable commitments." In fact, reinsurance makes substantial liquid assets available for insurers in case of exceptional losses.