Reinsurance program design
A reinsurance program is a set of reinsurance treaties designed to insure policy risks for all policies held by the insurer that fall:
- Within one type of line of business or peril.
- Under a certain monetary cap.
The line of business or peril covered by the reinsurance program is also known as the reinsurance coverage group.
Each reinsurance program is typically active for one year, and reinsurers that participate in the reinsurance program are bound to automatically cover qualifying claim losses.
Insurers typically assemble one reinsurance program per reinsurance coverage group.
Part of reinsurance design is deciding what types of risks are too expensive to include wholesale into the reinsurance program. If a risk on any policy falls outside the risks covered by the insurer’s reinsurance programs, the insurer can take out a facultative reinsurance agreement for that particular risk. Often, the insurer and the reinsurer both have the option to act or not act on this facultative agreement when a qualifying loss occurs.
Sometimes, a set of individual risks that are deemed as individual facultative risks can be bundled into a treaty rather than be handled by a series of individual facultative agreements. This type of treaty is known as a hybrid. The reinsurance program can included hybrid treaties.
Risk in the reinsurance program
The base unit of reinsurance in a reinsurance treaty is a risk, not the coverable. Often, several coverables are grouped into one risk. For instance, a policy might have a location that includes two buildings. For this policy, the buildings are the coverables, and the location is the risk. If a claim has only one exposure against one building, the total insured value of the location determines the share paid by each reinsurer.
Reinsurance coverage group and reinsurance program risk type
A commercial property insurer typically has one active reinsurance program for policy risks falling in the property reinsurance coverage group. The insurer typically also has another active reinsurance program for policy risks falling in the liability reinsurance coverage group. The insurer might also have one future and multiple past programs for each of these reinsurance coverage groups. While there is some consistency among insurers, a insurer may have their own way of categorizing the risks in various lines into different reinsurance coverage groups.
In Policy Center, the default configuration contains the following reinsurance coverage groups:
- Auto Liability
- Auto PD
- Liability
- Property
- Workers’ Compensation
See also
Treaties and program monetary layers in a reinsurance program
Policy risks of one reinsurance coverage group fall into various monetary ranges, and different reinsurers for that particular reinsurance coverage group cover some monetary ranges more aptly than others.
To build a reinsurance program, the insurer assembles one or more reinsurance treaties with the same reinsurance coverage type. Each treaty provides a different type of risk or loss coverage and provides it for a different monetary layer or range than the other treaties. These various treaties are arranged in the program to yield a measurable business advantage.
Each individual treaty can be drawn up with a different reinsurer from the other treaties. In addition, each individual treaty covers one and only one of the following:
- A different layer of monetary risk against all policies that have coverables in that reinsurance coverage group
- A different monetary range of loss for qualifying risks above a certain attachment point and below a cap
Treaties that provide coverage based on the risk are broadly known as proportional treaties. Treaties that provide coverage against loss for qualifying monetary risks between an attachment point and a cap are known broadly as non-proportional treaties, or excess of loss treaties.
See also
Using facultative agreements in addition to programs
After an insurer puts its reinsurance programs into place, there still might be some remaining risks that were too expensive to insure within the treaty framework. In addition to programs, the insurer can add facultative reinsurance agreements to cover the uncovered portion of each very high risk.
For more information, see Facultative agreements.