Wednesday, February 26, 2020

Reinsurance Forms for Personal Insurance

Various types of reinsurance may be used by personal insurers or insurance companies depending on the type of cover involved.

In all cases, the need for reinsurance will be determined by the retention level of the insurer concerned. The retention level is the limit which the insurer retains for his account.

Forms of Reinsurance


Under proportional reinsurance, the reinsurer accepts a fixed share of the risks accepted by the direct insurer. There are 2 (two) bases:
  • Quota share – where a fixed share of all the risks are reinsured.
  • Surplus – where only amounts above the direct insurer’s retention are reinsured.


Under non-proportional reinsurance, the reinsurer accepts losses in excess of an agreed amount, subject to an upper limit. The bases used are:

  • Excess of loss – which could be on an individual risk basis or on an occurrence basis where the aggregate loss from any one occurrence is reinsured.
  • Stop loss – where the direct insurer’s aggregate net losses for a year are reinsired. If they exceed a certain amount and/or a proportion of premium income.
Reinsurance may be placed on a facultative basis or by a treaty method. With facultative reinsurance, risks are reinsured on an individual basis. Treaty refers to the agreement to reinsure all of the risks falling within the terms of the treaty.


A household insurer will need to take account of exposure to losses arising:
  • On any one risk;
  • On any one event;
  • In aggregate in any one year.
Reinsurance should only be necessary where the insurer’s normal retention is exceeded, and in this case, a surplus treaty may be arranged.

Property risks do present a different problem. They are not usually independent. Fire may spread, explosion may damage several properties and natural perils such as storm, flood and earthquake can cause widespread damage. The major storms in 1987 and 1991 hightlighted the need for catastrophe reinsurance. This is normally arranged by an excess of loss treaty on an occurrence basis. The insurer may also require protection against aggregate loss exposure during the year, for which stop loss reinsurance would be appropriate.

Theft and Personal Possessions

Surplus reinsurance may be employed if retentions are exceeded. There is little risk of accumulation.

Personal Accident

Proportional reinsurance, usually surplus, can be arranged for sums insured above the insurer’s retention or for known accumulations (such as several people travelling on one aircraft). Excess of loss cover would be required for unknown accumulations.


The difficulty with liability covers, for example under a household policy, is that an insurer’s liability is not limited by a fixed sum insured, but by a substantial limit of indemnity for any one claim. As this is long-tail business (claims can take many years to resolve), payments may be made some considerable time after the occurrence giving rise to the claim. As a result, excess of loss reinsurance is most frequently used for liability covers.


Reinsurance may be needed on livestock covers for:
  • Large losses for valuable animals;
  • Accumulations for one insured, due to insured animals being housed or transported together;
  • Accumulation for several insureds, in the event of an epidemic.
For individual cases, a quota share treaty may be appropriate or facultative reinsurance may be arranged. For catastrophe situations, an excess of loss cover is suitable.

Lee Barnett, FCII. 1999. Personal Insurance. The Chartered Insurance Institute.

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