Blog 61: Reinsurance Structures by Xavier Lo, FIA, FRM, MBA

Firstly, thanks for all of you who reached out to me with questions. I personally prefer to reply through Instagram so feel free to reach out here! Today’s topic will be something that I should have gone through a while ago. Lets look quickly at the different types of basic Reinsurance Structures [再保險種類].

Reinsurance [再保險] is a way insurance companies pass off the risks to other insurance companies. We split them into two types: proportional [比例]and non-proportional [不成比] reinsurance. Proportional reinsurance just means that we share a defined ratio of the benefits and drawbacks with another company. For example, I give 30% of all the premium [保費] that I received to the reinsurer. In return, the reinsurer also pays me 30% of all the claims [賠償金] that I need to pay out to customers. Non-proportional reinsurance usually just covers losses above a certain amount. Say I was not comfortable with customers claiming for losses more than $1 million, I would just pay for the first 1 million of every loss and my reinsurer will pay the rest.

Another broad split of reinsurance is loss-occurring [意外發生] and risk-attaching [風險生效] reinsurance. Loss-occurring reinsurance is simple: if a loss comes in, and the reinsurance contract is active at the moment the loss happened, then the reinsurer makes a payment. Risk-attaching reinsurance is a bit more complex. When a loss happens, we have to first see if the reinsurance contract was actively covering the underlying insurance contract. This subtle distinction happens because the start dates [合約生效日期] of insurance and reinsurance contracts don’t necessarily match up. The above was quite confusing to me at first too – but draw up a timeline with different scenarios, then it’ll become a bit clearer.

Basically, you can think of reinsurance being split into 4 (2X2) categories as mentioned above. However, there are different details with each contract. As with all these technical details, please just DM me so we can discuss more!