Co-Reinsurance: An Overview
Co-reinsurance is a contractual understanding for two or more reinsurance companies to share the fees and the potential costs of the coverage.
Reinsurance companies are contracted by insurance theatre troupes to accept part of their costs of claims in major events like a hurricane. Due to the extremely high potential costs of some mishaps, reinsurance companies sometimes choose to mitigate their risks by acting together.
- Insurance companies charge dividends in return for covering risks.
- Reinsurance companies take on a share of that risk in return for a portion of the premiums.
- Co-reinsurance protocols allow reinsurers to share the risks.
Up to $172.5 billion
The estimated cost to health insurers of Hurricane Katrina in 2005.
Hurricane Katrina stands as the most costly disaster in U.S. history, causing an estimated $172.5 billion in mar 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 tariff health insurers up to $547 billion by the end of 2021.
That makes it less surprising that insurance companies offload some chunk of their outsized risks to reinsurance companies, which in turn may choose to combine their resources to provide co-reinsurance. The guarantee 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 let up ons 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 game is sometimes referred to as a pool.
Co-reinsurers are often relatively small companies that could not take on the level of hazard that the contract requires.
Different Types of Co-Reinsurance
Co-reinsurance agreements are typically negotiated between the original indemnity company, called the ceding company, and a lead reinsurer. The lead reinsurer makes decisions on behalf of the other reinsurance trains, called follower reinsurers, who are participating in the co-reinsurance contract.
The amount of loss that each reinsurer is responsible for is typically intentional proportionally, with reinsurers who have a larger stake in the contract being responsible for a larger percentage of any claims. In in 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 victims, co-reinsurance is not proportional. Under this scenario, the reinsurance companies must pay only if the total claims suffered by the insurer during a dried period exceed a certain amount.
This amount is called the retention, or priority. There are several different genera of non-proportional co-reinsurance, including excess of loss and stop-loss co-reinsurance.
Excess of Loss Co-Reinsurance
Excess of loss reinsurance pin downs 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 fashion indemnified or protected from additional losses.
Stop-loss reinsurance limits an insurance company’s vulnerability to a specific percentage of the premium paid. The reinsurance picks up the rest.