What are the different types of reinsurance?

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Reinsurance, often called insurance for insurance companies, is divided into two primary structural categories: Treaty Reinsurance and Facultative Reinsurance.

Core Contract Types

  • Treaty Reinsurance: A standing, long-term agreement where the reinsurer automatically covers an entire class or portfolio of policies written by the primary insurer (the cedent). The reinsurer must accept all risks falling within the scope of the treaty.
  • Facultative Reinsurance: A case-by-case agreement negotiated separately for individual, large, or unusual risks. The reinsurer retains the distinct option to evaluate, accept, or reject each individual risk proposed.

Proportional Reinsurance

In proportional arrangements, the reinsurer assumes an agreed-to percentage of both the premiums and the corresponding losses.

  • Quota Share: The primary insurer cedes a fixed, uniform percentage of all premiums and losses across an entire portfolio.
  • Surplus Share: The reinsurer covers only the liability and losses that exceed a specific dollar amount or retention limit established by the primary insurer.

Non-Proportional Reinsurance

In non-proportional arrangements, the reinsurer only steps in to pay claims if the primary insurer's total losses cross a predefined financial threshold.

  • Excess of Loss: The reinsurer pays for individual claims or events that surpass a specific priority retention limit.
  • Catastrophe Reinsurance: A specialized form of excess of loss protection designed to absorb massive losses from large-scale, catastrophic events like natural disasters.
  • Stop Loss / Aggregate Excess of Loss: Protects the primary insurer when overall portfolio losses or cumulative claims exceed a predetermined ratio or aggregate cap over a set contract period.

What are the four main types of reinsurance?

Reinsurance is risk management where an insurance company transfers a portion of its liabilities to a reinsurer. The market primarily categorizes reinsurance into four foundational types based on how contracts are structured and applied.

1. Treaty Reinsurance

  • Definition: A standing master agreement where the reinsurer automatically covers an entire portfolio or specified class of policies written by the primary insurer (cedent).
  • How it works: The reinsurer accepts all risks falling within the contract terms without evaluating individual policies.
  • Learn more: Read the Investopedia Reinsurance Guide for deeper structural breakdowns.

2. Facultative Reinsurance

  • Definition: Coverage purchased for a single, specific, or high-risk policy rather than a broad portfolio.
  • How it works: The reinsurer reviews the specific risk profile individually and retains the right to accept or decline the submission.
  • Usage: Commonly used for large, unusual, or complex exposures that exceed standard treaty limits.

3. Proportional (Pro Rata) Reinsurance

  • Definition: An arrangement where the reinsurer shares a fixed percentage of both the original premiums and the resulting claims.
  • How it works: If a reinsurer takes a 40% quota share, they collect 40% of the policy premium and pay 40% of any incurred losses.
  • Sub-types: Includes quota share and surplus share.

4. Non-Proportional (Excess of Loss) Reinsurance

  • Definition: Coverage where the reinsurer only pays for claims if the primary insurer's losses exceed a pre-agreed financial threshold.
  • How it works: The primary insurer handles all routine or smaller claims up to their retention limit; the reinsurer covers amounts above that ceiling.
  • Usage: Designed to protect companies against major catastrophes or severity spikes.

Who are the big four reinsurers?

The "Big Four" global reinsurers are Munich Re, Swiss Re, Hannover Re, and SCOR SE.

Overview of the Big Four

  • Munich Re: Based in Germany, it is currently the largest global reinsurer by scale.
  • Swiss Re: Based in Switzerland, it is a leading global life and property-casualty reinsurer.
  • Hannover Re: Based in Germany, it ranks among the top global reinsurers with a strong international footprint.
  • SCOR SE: Based in France, it completes the quartet as a major global life and non-life reinsurer.

Who are the top five reinsurers in the world?

The top five global reinsurers are divided into two distinct reporting categories by AM Best, based on whether they use IFRS 17 accounting or traditional Gross Written Premiums (GWP).

Top IFRS 17 Reporters (Ranked by Gross Reinsurance Revenue)

  • Munich Re (Germany): ~$35.4 billion
  • Swiss Re (Switzerland): ~$34.6 billion
  • Hannover Re (Germany): ~$31.5 billion
  • SCOR (France): ~$18.1 billion
  • China Re (China): ~$5.9 billion

Top Non-IFRS 17 Reporters (Ranked by Gross Written Premium)

  • Lloyd's (United Kingdom): ~$27.1 billion
  • Berkshire Hathaway (United States): ~$25.5 billion
  • Reinsurance Group of America / RGA (United States): ~$17.5 billion
  • Everest Re (Bermuda/US): ~$12.8 billion
  • RenaissanceRe (Bermuda): ~$11.7 billion

What is reinsurance and types of reinsurance?

Reinsurance is a risk-management practice where an insurance company (the ceding company) transfers a portion of its risk portfolio to another entity (the reinsurer) to reduce potential large payouts and stabilize financial health. It is often referred to as "insurance for insurance companies".

Main Types of Reinsurance Contracts

1. Treaty Reinsurance

  • Definition: An automatic standing agreement where the reinsurer covers an entire class or portfolio of policies issued by the primary insurer.
  • How it works: The reinsurer must accept all risks that fall within the scope of the treaty without evaluating each individual policy.

2. Facultative Reinsurance

  • Definition: Coverage negotiated separately for a single, specific, or high-risk policy.
  • How it works: The reinsurer evaluates the individual risk on a case-by-case basis and retains the right to accept or reject the proposal.

Financial Structures of Reinsurance

Proportional (Pro-Rata) Reinsurance

  • Quota Share: The primary insurer and reinsurer share a fixed percentage of all premiums and losses from a portfolio.
  • Surplus Share: The reinsurer covers only the amount of a risk that exceeds a specified financial retention limit of the primary insurer.

Non-Proportional Reinsurance

  • Excess of Loss: The reinsurer steps in to pay only when the primary insurer's losses cross a predefined retention limit or priority threshold for a specific risk or event.
  • Stop Loss / Aggregate Excess of Loss: Protects the primary insurer if its overall portfolio-wide loss ratio exceeds a pre-established percentage or aggregate dollar amount over a given period.

Reinsurance Basics

9 related questions found

What is the 9-month rule for reinsurance contracts?

The 9-month rule under statutory accounting principles requires reinsurance contracts to be fully finalized, reduced to writing, and signed within nine months of the policy period's commencement, or else be presumed retroactive.

📅 The 9-Month Rule Core Mechanics

  • Definition: A statutory accounting guideline (originating from SSAP 62).
  • Timeframe: Must formalize and sign the contract within 9 months.
  • Consequence: Missed deadlines trigger retroactive reinsurance accounting treatment.
  • Intent: Prevents hidden retroactive risk-shifting or artificial surplus manipulation.

⚠️ Accounting Implications

  • Prospective Treatment: Allowed if finalized on time and terms were agreed at inception.
  • Retroactive Reclassification: Unsigned contracts after 9 months force specialized deferred accounting for past losses.
  • Exceptions: Exemptions exist for novations, affiliate agreements with no surplus gain, and structured settlements.

How is reinsurance different from insurance?

Insurance protects individuals or businesses from unexpected losses, while reinsurance is essentially "insurance for insurance companies" that protects insurers from catastrophic or overwhelming claim payouts.

Key Differences

  • The Policyholder: In regular insurance, the buyer is an individual, family, or business. In reinsurance, the buyer (called the ceding company) is a primary insurance provider.
  • The Purpose: Insurance manages personal or corporate risk by pooling individual contributions to handle everyday accidents or losses. Reinsurance manages an insurer's balance sheet, preventing bankruptcy or insolvency after massive events like hurricanes, earthquakes, or a wave of large claims.
  • Relationship to the Public: Policyholders have a direct legal contract with their primary insurance company and deal with them directly. Reinsurance operates behind the scenes; the public generally has no direct contact with or legal link to the reinsurer. If a major disaster strikes, the primary insurer pays the customer first and then collects reimbursement from the reinsurer.
  • How Risk and Premiums Work: Insurance transfers individual risk to a company for a fixed premium. Reinsurance transfers a portion (or all) of an insurer's aggregated portfolio risk to a specialized Reinsurance Association of America member or global reinsurer in exchange for a portion of the collected premiums.

Who is the world's largest reinsurance company?

Munich Re is generally recognized as the world's largest reinsurance company by gross reinsurance revenue and overall market standing among traditional IFRS 17 reporters.

Leading Reinsurance Companies

Depending on accounting standards (AM Best's Top 50 Global Reinsurance Groups) and the specific metric used (such as gross reinsurance revenue versus non-IFRS gross written premiums), the top spots alternate between a few massive global entities:

  • Munich Re (Munich Reinsurance Company): Headquartered in Germany, it frequently holds or reclaims the #1 spot for IFRS 17 reporting reinsurance revenue.
  • Swiss Re: Headquartered in Switzerland, it competes directly for the top global position depending on the fiscal year and reporting adjustments.
  • Lloyd's of London: Operates as the world's largest insurance and reinsurance marketplace/exchange.
  • Berkshire Hathaway: Tops the list for non-IFRS reporters based on massive capital strength and gross written premiums.

Who are the largest reinsurance brokers in the world?

The largest reinsurance brokers in the world are Aon Reinsurance Solutions and Guy Carpenter (the reinsurance division of Marsh McLennan), which fiercely contend for the top position depending on annual revenues and market segments.

Top Global Reinsurance Brokers

  • Aon Reinsurance Solutions: Operates as a primary global giant providing treaty, facultative, and capital market solutions.
  • Guy Carpenter: The reinsurance broking arm of Marsh McLennan, competing closely at the very peak of global market revenues.
  • Gallagher Re: The dedicated global reinsurance division of Arthur J. Gallagher & Co., holding the third-largest position worldwide.
  • Howden Re: The reinsurance arm of the international Howden group, ranking as the fourth major global competitor.
  • Other Notable Firms: Prominent independent or specialized reinsurance specialists include Lockton Re, BMS Re, and Acrisure Re.

Which is the No. 1 insurance company?

State Farm is the No. 1 property, casualty, and auto insurance company in the U.S. based on market share and direct premiums written.

Because the "number one" ranking changes depending on the specific type of insurance, top leaders across different categories include:

  • Auto and Property & Casualty (U.S.): State Farm ranks No. 1 by market share.
  • Health Insurance (U.S.): UnitedHealth Group is the largest provider by membership and revenue.
  • Life and Health Insurance: MetLife ranks No. 1 in direct premiums written and leads categories like Fortune's World's Most Admired Companies for life/health.
  • Global Revenue: UnitedHealth Group and Berkshire Hathaway lead globally.