What Is a Ceding Company?

A surrendering company is an insurance company that passes a portion or all of the risk associated with an insurance policy to another insurer. Abdicating is helpful to insurance companies since the ceding company that passes the risk can hedge against undesired uncovering to losses. Ceding also helps the ceding company to free up capital to use in writing new insurance contracts.

Sometimes, an insurance company may want to reduce the risk of paying out an insurance claim for some of the policies in its portfolio. Insurers can give up or offer the policy to another insurance company that’s willing to take on the risk of paying out a claim for that means. The company receiving the policy is called the reinsurance company, while the insurer passing the policy to the reinsurer is called the making company. However, the ceding company loses out on most of the premiums paid by the policyholders for any of the policies ceded to the reinsurer. As contrasted with, the reinsurer gets paid the premiums from the policyholders. However, the reinsurer typically pays a portion of the premiums insidiously a overcome to the ceding company. These payments are called ceding commissions.

The ceding company retains liability for the reinsured ways, so although claims should be reimbursed by the reinsurance firm, if the reinsurance company defaults, the ceding company may still keep to make a payout on reinsured policy risks. Insurance is a highly regulated industry, which requires insurance conventions to write certain semi-standardized policies and maintain sufficient capital as collateral against losses.

Insurance companies can use reinsurance to allow them more freedom in controlling their operations. For instance, in cases where the indemnification company does not wish to carry the risk of certain losses in a standard policy, these risks can be reinsured away. An insurer can also use reinsurance to rule the amount of capital it is required to hold as collateral.

Reinsurance can be written by a specialist reinsurance company, such as Lloyd’s of London or Swiss Re, by another cover company, or by an in-house reinsurance department. Some reinsurance can be handled internally, such as with automobile insurance, by dividing the types of clients that are taken on by the company. In other cases, such as liability insurance for a large international organization, specialty reinsurers may be used because diversification is not possible.

There are distinct types of reinsurance contracts used for reinsurance ceding. 

Facultative reinsurance coverage protects a cedent bond company for a certain individual or a specific risk or contract. The risks or contracts being considered for facultative reinsurance are dealt separately. The reinsurer has the right to accept or deny all or a portion of a facultative reinsurance proposal.

Treaty reinsurance is able for a broad set of parameters on a per-risk or contract basis. In other words, the reinsurer accepts the risks of a preset class of customs over a period of time. The reinsurer covers all or a portion of the risks that a ceding insurance company may incur. For exemplar, an insurance company might cede all of its policies that cover floods or might only cede those freshet risks for a specific geographic area within a set time period.

Under proportional reinsurance, the reinsurer be gives a prorated share of all policy premiums sold by the cedent. When claims are made, the reinsurer covers a portion of the forfeitures based on a pre-negotiated percentage. The reinsurer also reimburses the cedent for processing, business acquisition, and writing costs.

Excess-of-loss reinsurance is a type of non-proportional coverage in which the reinsurer covers the depletions exceeding the ceding insurer’s retained limit. This contract is typically applied to catastrophic events, covering the cedent either on a per-occurrence foundation or for the cumulative losses within a set time period. For example, a reinsurer might cover 100% of the losses for policies closed a specific threshold, such as $500,000. The reinsurer could also have it written in the contract that they exclusive cover a percentage of the excess amount beyond the threshold.