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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 8-1 describes the characteristics of each type of reinsurance contract.
Figure IG 8-1
Characteristics of reinsurance contracts
Type of reinsurance
Definition
Proportional
  • Insurer and reinsurer share in the risks and rewards of the contract
  • Participation is typically a percentage. Therefore premium paid to and losses recovered from the reinsurer vary based on the premium amount and claim experience
  • Examples include quota share, surplus share, co-insurance and fronting reinsurance contracts
Non-proportional
  • Insurer typically pays a fixed premium, which allows recovery from the reinsurer if claims exceed a set threshold
  • Examples include excess of loss contracts, which may be structured per risk, per occurrence, or total claims incurred in aggregate
Reinsurance contracts are also categorized as either treaty or facultative contracts. A treaty 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. Figure IG 8-2 summarizes the characteristics of alternative reinsurers.
Figure IG 8-2
Characteristics of alternative reinsurers
Reinsurance counterparties
Description
Syndicate
  • A group, association, or pool of insurance entities that share in the underwriting results of the underlying business
  • Typically used when the underlying exposures are significant, and /or the policies include high limits
  • Examples include assigned risk pools and Lloyd’s of London
Special purpose vehicle
  • Structure created to allow investors to assume insurance risk for a premium, may be cheaper than traditional reinsurance
  • Insurers cede premium and particular exposures to the structure, and the structure issues notes to investors
  • Investor’s exposure is capped at their investment
  • Examples include captive insurance entities and risk retention groups
Reinsurance contracts can be highly customized agreements. Careful evaluation of the contract terms and understanding of the business purpose is necessary in deriving the appropriate accounting conclusion.

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.

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