The ceding company keeps a certain amount of risk or liability from an insurance policy or policies, which is known as underlying retention, even after reinsuring the remaining balance. The amount of retention will differ based on how the ceding company evaluates the risks of keeping some of the policy liability and the profitability of the insurance policy.
Learn more about Underlying Retention
Retaining some policies allows the insurer to not pay for reinsurance. They keep the profitable policies and reinsure the riskier ones.
Reinsurance is when insurers transfer some of their risk to other parties to lower the chance of having to pay a big insurance claim.
Insurers can stay financially stable through reinsurance, as it helps them recover the money they paid to claimants. Reinsurance lessens the overall risk and provides protection against major losses. Additionally, it enables insurance companies to expand their underwriting abilities by taking on more and larger risks.
Reinsurance provides additional protection for insurers by covering their accumulated individual commitments. This helps to ensure the insurer’s equity and solvency, as well as providing more stable results during unexpected and significant events. With reinsurance, insurers can underwrite policies that cover a larger number of risks without incurring excessive administrative costs to maintain their solvency margins. Furthermore, reinsurance also provides insurers with access to significant liquid assets in the event of exceptional losses.
Underlying Retention in Reinsurance
In proportional reinsurance, the reinsurer gets a portion of all policy premiums from the insurer. They also cover a part of the losses when claims are filed, as per an agreed percentage. Additionally, the reinsurer pays back the insurer for processing, business acquisition, and writing expenses.
In non-proportional reinsurance, the reinsurer becomes responsible if the insurer’s losses go beyond a specific amount called the priority or retention limit. This means that the reinsurer does not have a proportional stake in the insurer’s premiums and losses. The priority or retention limit can be determined based on a particular risk type or an entire category of risks.
Excess-of-loss reinsurance is a non-proportional coverage where the reinsurer covers losses that go beyond the insurer’s limit. It’s usually used for catastrophic events, providing coverage either per occurrence or for total losses in a specific time frame.
Under risk-attaching reinsurance, all claims that happen during the effective period are included, regardless of when the losses occurred. Claims that originate outside the coverage period are not covered, even if the losses happened while the contract was active.