Combination Plan Reinsurance

We're going to have to deep dive into the reinsurance business here, so make sure you have some coffee handy...

Insurance companies have insurance companies too. These firms are called reinsurers. You might think this results in the most boring sales meetings of all time (and we're not going to argue with you). But these reinsurance policies help insurance companies limit their exposure to risk.

Reinsurance policies come in a variety of flavors. One form depends on what's called "quotas." In a quota system, the original insurance company (called the "ceding company" in the industry jargon) and the reinsurer share any losses according to a fixed percentage. So the ceding company might ask the reinsurer to take on 20% of the risk. They will then pay out 20% of any losses incurred, and will likely receive 20% of all premiums received as compensation.

Another form of reinsurance involves protecting companies against losses above and beyond a certain point. In these cases, the ceding company receives all the premiums and pays out all claims up to a certain point. If losses mount above a certain threshold, the reinsurer steps in and covers any additional costs. For this, the ceding company pays a certain amount for the coverage. They are fundamentally buying an insurance policy the same way you might.

Combination plan reinsurance uses aspects of both these structures. The ceding companies pay all claims up to a certain point. Above that level, the reinsurance company steps in. However, instead of covering all the losses, the reinsurer covers a fixed percentage; a quota system is in place from there.

This is a riskier situation for the ceding company, because there's no total cap to the losses. But the coverage will likely be cheaper, because the reinsurer is taking on less risk themselves.