What Is Reinsurance Ceded?
Let me explain reinsurance ceded directly: it's the portion of risk that you, as a primary insurer, transfer to another insurer to cut down your overall exposure. This other insurer is typically a reinsurance specialist, and this setup helps you manage the risks you take on from your clients.
In this arrangement, you're the ceding company, and the reinsurer is the accepting company. They get a premium from you in return for shouldering that risk. Think of reinsurance as 'stop-loss insurance'—it caps the maximum losses you might face in a disaster scenario.
Key Takeaways
- Reinsurance ceded lets insurance companies share coverage portions with others to lower portfolio risk.
- You're essentially sub-contracting some responsibility for the coverage.
- You stay as the client's main contact.
- It spreads the load on catastrophic claims across multiple insurers.
- Reinsurance is its own sub-industry, with specialists in specific coverage types.
Understanding Reinsurance Ceded
You need to know that reinsurance protects insurers from claims that could wipe them out financially, like those from a massive hurricane. By ceding some risks, you reduce your total exposure and can offer lower premiums to all clients.
The reinsurance contract between you and the accepting company spells out all terms, including when they'll pay claims. They also pay you a ceding commission to cover your admin, underwriting, and other costs. Plus, you can recover part of claims from them.
Reinsurance often comes from specialist firms. Big names include Swiss Re Ltd., Berkshire Hathaway Inc., and Reinsurance Group of America Inc. Sometimes, you handle it internally, like with auto insurance by diversifying clients. For big liability cases, though, you might need a specialty reinsurer since diversification isn't feasible.
Here's something important: you can layer ceding and reinsurance to build a portfolio where claims stay below your premiums and investment income.
Types of Reinsurance Contracts
There are two main types for ceding reinsurance: facultative and treaty.
Facultative Reinsurance
In facultative reinsurance, you negotiate each risk individually with the reinsurer for a premium. They can accept or reject parts or the whole contract.
Treaty Reinsurance
With treaty reinsurance, you and the accepting company agree on a wide range of covered transactions. For instance, you might cede all flood risks, and they accept those in a specific area like a floodplain.
Fast Fact
Munich Re Group is the world's largest reinsurer as of 2022, handling about $43.1 billion in net premiums, according to Statista.
Benefits of Reinsurance Ceded
The insurance world is full of risks, and ceding reinsurance keeps things stable. It helps you manage earnings swings and keep enough capital reserves—essential for any business success.
It also lets you underwrite more policies without jacking up solvency margin costs, which are the excess of your assets over liabilities. Ceding frees up liquid assets for unexpected claims.
For your clients, it simplifies things—they don't shop around for multiple insurers; you handle the risk distribution behind the scenes.
Challenges to Reinsurance Ceded
Reinsurance contracts are negotiated case by case and have gotten more complex, as Deloitte points out in their Modernizing Reinsurance Administration report. Large insurers deal with thousands of these, and many haven't updated their tech systems to manage them well.
The biggest issue is the unpredictability of catastrophes—like how COVID-19 hit reinsurers in travel and events hard.
Regulation of Reinsurance Ceded
In the U.S., insurance is mostly state-regulated, so you follow rules in each state you operate in, which multiplies in global business.
Reinsurance isn't as tightly regulated since reinsurers don't deal with policyholders directly—no consumer protections apply. Still, they need licenses in each state and must meet regulations and reporting there.
Questions & Answers
What Is the Difference Between Reinsurance Ceded and Reinsurance Assumed? Reinsurance ceded is when you, the insurer, pass off risk to another company; reinsurance assumed is that company taking it on.
What Is a Ceded Loss Ratio? The loss ratio is losses paid versus premiums received, as a percentage—it's a profitability indicator. Ceded loss ratio shows how much risk and premiums you're passing to reinsurers.
What Is the Difference Between Surplus Share Reinsurance and Quota Reinsurance? In surplus share, you keep liabilities up to a limit and pass the rest. In quota share, you pass risks up to a limit, and you're responsible beyond that.
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