Treaty Reinsurance

Categories: Insurance

Georgie-Boy Insurance Co. took on too much risk. Too much insurance doled out. Not to fret...Georgie-Boy will just pass the risk onto another insurance company by buying treaty reinsurance.

Treaty reinsurance is when one insurance company (the “cedent”) buys insurance from another company. (the “reinsurer”). In exchange for some money, the cedent takes on specific, predetermined risks based on the insurance policy for the reinsurer.

Just FYI: there are three types of reinsurance: treaty reinsurance, facultative reinsurance, and excess of loss reinsurance.

If this is all new to you and you feel caught off guard, just know that treaty reinsurance is more like a marriage than a fling. Treaty reinsurance is usually a long-term contract based on lots of number-crunching and risk calculations.

Treaty reinsurance contracts can either be proportional, where the reinsurer agrees to pay a percentage of policies (for which it will gain those premiums), or non-proportional, which is kind of like where the cedent pays a deductible and the reinsurer agrees to pay the rest...the amount of insurance above a specific deductible-esque amount over a specific timeframe.

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Finance: What is reinsurance?7 Views

00:00

and finance Allah shmoop What is re insurance Oh all

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right people When life takes a swing at you you'll

00:09

be glad you bet against yourself with insurance Did you

00:13

get into a car accident Well good thing you bet

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that you would Now you get a car insurance payout

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in the hospital while you won your own bed against

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yourself Because you win a health insurance payout Well the

00:25

insurance industry makes these bats with us They bet you'll

00:29

be fine I'll collect those premiums In the meantime thank

00:33

you While you're betting my life is a dangerous place

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and I'm a mere mortal meat bag from individuals to

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companies insurance seems available for well pretty much anyone to

00:44

buy to bet against themselves Everyone except the insurance company

00:48

Pretty much But who Insurers Insurance companies How can we

00:52

trust that they'll be there with our payouts when we

00:55

need them What if they go under because other people's

00:57

payouts made their funds run dry while the answer insurance

01:01

companies ensure each other i e They deploy reinsurance insurance

01:06

companies cover themselves by covering each other That's reinsurance That's

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what it is You might have thought Insurance companies air

01:12

all competitors enemies to each other But in fact they're

01:15

more like frenemies Who coop it Tate Take Ricky's insurance

01:23

company right here This guy They cover a lot of

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people's homes in case of an earthquake Well guess what

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When the earthquake struck Ricky's insurance company got lucky It

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was big enough and that was making enough money from

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investing all those monthly premiums to make the promised payouts

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to the quake stricken homeowners And when it was time

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there was only a few $1,000,000 worth of damage and

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that was it Ricky took on all of that risk

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is an insurance company and ended up well basically dodging

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a bullet But just down the road Ricky's brethren Romans

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didn't fare so well Roman's insurance company also in the

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quake insurance biz had to make a big payouts after

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the town was shaken not stirred Romans insurance company insured

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300 freestanding homes all of which were left completely decimated

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Now Romans and Wells left with a cool $382,000,000 to

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pay out and they don't have that money on hand

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right Romans had no choice but to close up shop

02:18

in declare bankruptcy leaving all those homeowners with quake and

02:21

shake insurance from Romans Insurance Company up this creek While

02:25

this situation is obviously not so great for Roman it's

02:27

also not so great for the entire insurance industry either

02:31

How can people be sure their insurance company will be

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there to pay when they need them to pay well

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without a guaranteed payout as agreed upon in the initial

02:39

insurance contract during the insurance time of need it becomes

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too risky for your average Joe to be paying monthly

02:45

premiums What's the point of paying every month if you're

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not even sure your insurance company will be there to

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cover you when you need him Alas a new era

02:53

was born in the insurance industry Insurance companies banded together

02:56

Is frenemies spreading risk among themselves keeping each other and

03:00

therefore their whole industry afloat People no longer had to

03:03

worry about being left high and dry by their insurance

03:06

company because like them their insurance company was insured more

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left So in order to manage the risk of complete

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company death the world of reinsurance began to be a

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thing in the reinsurance biz There's the seeded company this

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thing the one getting insured seeding the dough and the

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reinsurer the one taking on some risk for the other

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insurance company Well as with your insurance your insurance company

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if they're reinsured pays premiums to the reinsurance company in

03:34

exchange for a come rescue me when I need you

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Ticket Well there are two main types of reinsurance contracts

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Treaty reinsurance and faculty tive Reinsurance Yeah say that three

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times Fast Treaty reinsurance is more broad covering an area

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of an insurance company's risk For instance treaty insurance might

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cover a company's earthquake insurance contracts but not flood and

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or fire While treaty reinsurance is more general insurance for

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insurance companies faculty tive reinsurance is the emergency insurance It's

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pretty specific covering more unusual situations that might occur like

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Martian happenings or huge earthquakes or ah Noah like flood

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faculty tive reinsurance is there to cover everything that treaty

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reinsurance doesn't When the you know what hits the fan

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how do insurance companies ensure each other There are different

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types of reinsurance for instance proportional and none proportional those

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air two types proportional reinsurance means the reinsurer agrees to

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cover a percentage of an insurance policy For instance Ricky's

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insurance company could have agreed to be a reinsurer for

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Romans insurance company for earthquake insurance is up to 70%

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of the damages We'll that would also mean Ricky's insurance

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company gets some of the premium payments from Romans insurance

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company non proportional reinsurance on ly kicks in once the

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seeding company company paying out the dough in premiums passes

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a retention limit For instance Romans could buy reinsurance from

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Ricky's which would cover claims over $10,000,000 add up to

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like $100,000,000 Romans would be responsible for covering the 1st

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10,000,000 on its own but would get some help from

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Ricky's if claims were larger than 10,000,000 bucks Ricky's will

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cover all claims after the 10,000,000 mark But well they

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stopped short of 100,000,000 mark because hey they aren't made

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of money Any earthquake claims exceeding 100,000,000 mark would be

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back on Romans They're also rules that re insurers can

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apply the contracts each called basis like risks attaching basis

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and losses occurring basis risks attaching basis means claims can

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be made later after the reinsurance contract has expired Will

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the event that led to the claim needs to have

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happened within the contracts time frame But the insurance claim

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from that event can happen later And the reinsurer well

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they just need to pay up well For instance let's

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say Randy a homeowner with earthquake insurance covered by Romans

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Insurance Company was on vacation when the quake was a

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shaken well Ricky's was covering Romans on a proportional earthquake

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contract Randy came home to find his house well gone

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making his claim much later than everyone else is In

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the meantime you have quite reinsurance contract between Ricky's and

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Romans expired Ricky's would still have to cover Randy via

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Romans insurance company at the agreed upon percentage in the

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now expired contract since the earthquake happened when the contract

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was still a thing but only if the reinsurance had

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a risks attaching basis That's the only way they get

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paid legally Losses occurring basis is kind of the opposite

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where all claims during the reinsurance contract period are covered

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If the earthquake contract between Ricky's and Romans was on

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a losses occurring basis well then it means Romans would

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have to cover Randy on its own without the help

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of Ricky's A loss is occurring bases reinsurance structure means

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that only claims during the contract period or covered making

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the reinsurer not responsible for anything once it's expired So

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yeah once insurance companies finally sat down on the table

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together they began making all kinds of reinsurance deals All

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of the seeding insurance companies went cover themselves so they

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can remain solvent in the long run And all of

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the insurer insurance companies want to make sure they aren't

07:06

taking on too much risk Some insurance companies find themselves

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on both sides sometimes as the seeding company and sometimes

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as the insurer That being said there are specialised re

07:15

insurance companies companies that on Lian sure other insurance companies

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So yeah that's reinsurance for Ricky's and Romans It's sort

07:22

of in I've got your back Jack You've got mine

07:25

Situation comes in handy when one of them has an 00:07:28.521 --> [endTime] itch Yeah

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