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The term of a facultative agreement coincides with the term of the policy. Facultative reinsurance is usually purchased by the insurance underwriter who underwrote the original insurance policy, whereas treaty reinsurance is typically purchased by a senior executive at the insurance company. The reinsurer's liability will usually cover the whole lifetime of the original insurance, once it is written. However the question arises of when either party can choose to cease the reinsurance in respect of future new business.

Reinsurance treaties can either be written on a "continuous" or "term" basis. A continuous contract has no predetermined end date, but generally either party can give 90 days notice to cancel or amend the treaty for new business. A term agreement has a built-in expiration date. It is common for insurers and reinsurers to have long-term relationships that span many years. Reinsurance treaties are typically longer documents than facultative certificates, containing many of their own terms that are distinct from the terms of the direct insurance policies that they reinsure.

However, even most reinsurance treaties are relatively short documents considering the number and variety of risks and lines of business that the treaties reinsure and the dollars involved in the transactions. They rely heavily on industry practice.


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There are not "standard" reinsurance contracts. However, many reinsurance contracts do include some commonly used provisions and provisions imbued [ clarification needed ] with considerable industry common and practice.

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Sometimes insurance companies wish to offer insurance in jurisdictions where they are not licensed, or where it considers that local regulations are too onerous: for example, an insurer may wish to offer an insurance programme to a multinational company, to cover property and liability risks in many countries around the world. In such situations, the insurance company may find a local insurance company which is authorised in the relevant country, arrange for the local insurer to issue an insurance policy covering the risks in that country, and enter into a reinsurance contract with the local insurer to transfer the risks to itself.

In the event of a loss, the policyholder would claim against the local insurer under the local insurance policy, the local insurer would pay the claim and would claim reimbursement under the reinsurance contract. Such an arrangement is called "fronting".

Catastrophe Insurance

Fronting is also sometimes used where an insurance buyer requires its insurers to have a certain financial strength rating and the prospective insurer does not satisfy that requirement: the prospective insurer may be able to persuade another insurer, with the requisite credit rating, to provide the coverage to the insurance buyer, and to take out reinsurance in respect of the risk. An insurer which acts as a "fronting insurer" receives a fronting fee for this service to cover administration and the potential default of the reinsurer. The fronting insurer is taking a risk in such transactions, because it has an obligation to pay its insurance claims even if the reinsurer becomes insolvent and fails to reimburse the claims.


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Many reinsurance placements are not placed with a single reinsurer but are shared between a number of reinsurers. The reinsurer who sets the terms premium and contract conditions for the reinsurance contract is called the lead reinsurer; the other companies subscribing to the contract are called following reinsurers.

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Alternatively, one reinsurer can accept the whole of the reinsurance and then retrocede it pass it on in a further reinsurance arrangement to other companies. Using game-theoretic modeling, Professors Michael R.

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Powers Temple University and Martin Shubik Yale University have argued that the number of active reinsurers in a given national market should be approximately equal to the square-root of the number of primary insurers active in the same market. Ceding companies often choose their reinsurers with great care as they are exchanging insurance risk for credit risk.

Best, etc. However, reinsurer governance is voluntarily accepted by cedents via contract to allow cedents the opportunity to rent reinsurer capital to expand cedent market share or limit their risk.

Extreme hurricanes show benefits of pooling catastrophic risks across states

From Wikipedia, the free encyclopedia. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. Department of the Treasury. December Retrieved September 11, Their triggers comprise one or more of the following: a an indemnity trigger based upon the actual loss or reserves carried by the insurer or reinsurer and relating to a particular natural catastrophe; b an industry loss based upon an index of industry-wide losses arising from a particular event; or c a parametric trigger based upon the severity of the event such as a storm measured on the Saffir-Simpson scale or an Richter scale registering earthquake.

With recent hurricanes Harvey and Irma hitting US coastal states after devastating Caribbean islands, there is no doubt that ILS as an alternative asset class have became a focus for various market participants. In particular, it is used by institutional investors including pension and hedge funds as a mean of diversification as an uncorrelated and relatively stable high-yield returns generating instrument.

As the ILS market is still young it is hard to overestimate September as an examination taking the asset class into the new dimension. Even though early estimates indicate that most ILS investors will avoid direct losses, the framework has been properly stress-tested. This testing has included the overall strategies of dedicated ILS funds, user models, industry loss attachment points and the live cat bonds market. It has even considered the protection gap between insured and overall losses recently reiterated by the World Bank with its Mexican, African, Caribbean and Philippines parametric trigger bonds.

Accordingly, there is no doubt that hurricanes Harvey and Irma will be multi-task learning events as hurricane Sandy was in The reaction to such events demonstrate the maturity of the sector. It could be considered one of the key trends for capital and reinsurance markets convergence and a future face of catastrophic risk protection.

WEBCAST: Insurance and Reinsurance Applications of @RISK

ILS came into being after hurricane Andrew in when capacity in the reinsurance market was squeezed. It has grown significantly since hurricane Katrina in , the financial crisis of and new risk-based capital regulatory regimes such as Solvency II introduced by the EU in Growth in the market has been strong and the returns good.

To an extent, the lack of natural catastrophes in the Gulf of Mexico has assisted returns. That said, the lack of disasters has operated to depress market premiums. Most investors have a sufficient spread of risk to ensure that one loss will leave them with a reasonable return and the prospect of increasing future premiums. The constraint on additional investment is the limit of available investment opportunities rather than the availability of investment funds. With this in mind, many in the ILS sphere have been exploring ways to increase investment opportunities and present further diverse options.

The idea is to allow investors to diversify their portfolio not only into ILS but also within the asset class. Natural disaster and other insurance-related risk do not correlate. For example, Japanese earthquake risk is uncorrelated to North American wind storm risk. During this search for risk opportunities an urgent need for protection has emerged.

Across the world, countries are looking at risks and seeing how these can be protected against and whether the insurance industry alone can bear those risks. These are reinsurance companies, funded by the insurance industry which have the government as the reinsurer of last resort to provide protection against terrorist risk and flood risk. In other jurisdictions, governments or quasi-governmental entities have underwritten storm and earthquake risk.

The goal is to ensure that the population and commerce is protected in circumstances where the insurance industry is either not sizeable enough to cope or cannot offer terms at affordable rates. Many of these solutions utilise ILS products. It plays a critical role in the management of catastrophic risk, as it provides a mechanism for insurers to transfer some of their exposure and helps protect them when losses surge after extreme wind events like hurricanes.

Explaining the Failure to Insure Catastrophic Risks

Typically, this risk is spread further still, either by the insurer purchasing policies from multiple reinsurers or when a reinsurer sells part of the risk to other reinsurers operating in that market. In addition to providing a mechanism for insurers to manage their exposure to catastrophic risk, catastrophe reinsurers potentially benefit through diversification by covering different types of catastrophes such as from extreme winds, floods or earthquakes and covering those risks across a wide geographic area. For the largest reinsurers, this could be on a global basis.

But these important benefits may be less valuable in a market where reinsurance pricing does not sufficiently reflect the risks. The trend has continued this year. While lower prices provide obvious benefits to regular insurance companies and potentially consumers in the short to medium term, it also increases the likelihood of price spikes and a sharp drop in reinsurance capacity in the event of a very large catastrophic loss or a series of substantial shock losses.

The experience of the Florida market following the combined losses from the and hurricane seasons illustrates the potential problems when large shock losses result in significant price volatility.


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  6. The last significant hurricane event in Florida before that was Andrew in Typically, major hurricanes category occur once every 14 to 20 years across south Florida. Given the size of the losses, a jump in insurance rates was expected. But the magnitude was even greater due in part to substantial price increases from the reinsurance market.

    Concerns about affordability of insurance for property owners in Florida were one of the key issues in the gubernatorial election, and this led to a special legislative session on property insurance reform. There also were calls for a national solution through the creation of a federal catastrophic wind risk pool, in which coverage for extreme wind events would be provided by the US government.

    While there was little support outside Florida for this type of approach at the time, the debate in the US about establishing a mechanism for insuring catastrophic wind risk at the national level has been ongoing and predates the substantial losses from the and hurricane seasons. In order to better understand geographic diversification of catastrophic risk, two colleagues and I used a catastrophe model and property data from the American Community Survey to calculate damage from tropical cyclone events hurricanes and lesser tropical storms.