Reinsurance program overview

An insurer might want to transfer their risk of loss for several reasons:

To protect capital and maintain solvency
To provide a more even flow of net income over time by flattening out claims losses
To take on more business and across a larger set of risks than the insurer would normally retain
To spread risk over the globe and take advantage of currency advantages
To provide catastrophe relief
To withdraw from a line of business

The insurer might find it advantageous to bundle various types of reinsurance in a way that maximizes its ability to achieve these business goals.

For instance:

Insurers that want to increase capacity benefit from reinsurance that either takes a percent of the risk or takes a loss above a certain point. If an insurer can be free of fear of multiple large losses, it can comfortably take on more risk.
Insurers that seek to stabilize their net income flow benefit from reinsurance that takes a percent of the loss above a certain point.
Insurers that want to withdraw from a line of business benefit from reinsurance that takes on a percentage of risk under a certain loss point for that line of business.

Whether an insurer has one or more of these business goals in mind, common industry practice has established that the insurer can achieve these goals through reinsurance. In setting up reinsurance programs, insurers take into account factors such as:

The insurer’s average policy claim losses and premium intake
Likelihood of catastrophe
Proximity of policies taken out in a geographic location

Insurers group reinsurance treaties into reinsurance programs to cover policy risks in a way that maximizes their business goals. They also group treaties into programs to ensure that they have no gaps in coverage and to ensure that they do not duplicate coverage.