Expand
Reinsurance contracts can be customized for specific exposures, events, and limits based on the negotiation between the ceding and assuming entities. Broadly, the two types of reinsurance contracts are proportional and non-proportional. Figure IG 9-1 describes the characteristics of each type of reinsurance contract.
Figure IG 9-1
Characteristics of reinsurance contracts
Type of reinsurance
Characteristics
Proportional
  • The reinsurer’s share of risk is fixed for each underlying contract, as a percentage or an amount. Therefore, premium paid to and losses recovered from the reinsurer are shared based on that proportional relationship.
  • Examples include quota share, co-insurance, modified co-insurance, yearly renewable term, and fronting reinsurance contracts
Non-proportional
  • Insurer typically pays a fixed premium and receives claim reimbursement from the reinsurer if claims exceed a set threshold. The reinsurer’s share can only be determined sometime after claims are incurred.
  • Examples include aggregate excess of loss and excess of time contracts, which may be structured per risk, per occurrence, or total claims incurred in aggregate
Reinsurance contracts are also categorized as either automatic or facultative contracts. An automatic contract automatically covers (attaches) direct contracts with specific characteristics when the underlying direct policy is issued. Facultative contracts require the reinsurer to approve each new policy before it can be attached to a reinsurance contract. An insurance entity may enter into a reinsurance contract directly with a reinsurer (or pool of reinsurers) or may use alternative structures in order to involve non-reinsurers interested in assuming the risk, such as mortality bonds.
Reinsurance contracts can be highly customized agreements, including side agreements covering related items such as investment restrictions and/or service and administration. Evaluation of the contract terms and an understanding of the business purpose are necessary to determine the appropriate accounting.
Figure IG 9-2 describes the characteristics of common forms of long-duration reinsurance contracts.
Figure IG 9-2
Common long-duration reinsurance contracts
Form of reinsurance
Characteristics
Yearly renewable term (YRT)
  • Also called annual renewable term or mortality risk premium reinsurance
  • Only base mortality or morbidity risk is covered. Premium rates for future years may be guaranteed for a short period (typically for one-year) and/or subject to maximums. The premium rates are commonly expressed as a rate per thousand of coverage, vary by the age of the underlying direct policyholder and are multiplied by the net amount at risk of the policy to determine premium due.
Coinsurance
  • Reinsurer participates in the risk of loss due to mortality or morbidity, lapses, and the investment risk, if any, in the underlying policy. The participation may be a specified percentage (quota share) of premiums and claims and may have a maximum limit, or may cover amounts in excess of a specified retention limit.
Modified coinsurance (modco) or funds withheld
  • Coinsurance in which the ceding entity does not transfer cash or investments to cover future benefit liabilities. The ceding entity keeps control of investments supporting the liabilities and has a payable to the reinsurer that is adjusted each period for investment and insurance experience.
Stop loss/excess of loss
  • Reinsurer participates in adverse claim experience of a block of covered policies (i.e., claims above a predetermined dollar amount within a specified time period or from a single event).

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Expand Expand
Resize
Tools
Rcl
Add to favorites
Please ensure
that you select
Print Background (colors and images) when printing.
CONTINUE
PwC image modal

This content is copyright protected. It is for your own use only - do not redistribute. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license.

Warning 2

✕

Welcome to Viewpoint, the new platform that replaces Inform. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

Viewpoint allows you to save up to 25 favorites.

Consider removing one of your current favorites in order to to add a new one.

Go to favorites

Are you sure you would like to remove this page from your list?

Yes
You are already signed in on another browser or device.
Click Continue if you want to automatically close other logged in sessions and continue. If you want to manually check for other active logged in sessions first, please select Cancel to go back to the previous page.
Need some help? Contact us
signin option menu option suggested option contentmouse option displaycontent option contentpage option relatedlink option prevandafter option trending option searchicon option search option feedback option end slide
✕

Hello and welcome to Viewpoint

Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. Follow along as we demonstrate how to use the site

Before we start.

Choose your preferred language below.