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There are two categories of reinsurance:

Treaty reinsurance agreements cover all or a portion of an insurer’s risks, and they are effective for a certain time period.
Facultative coverage insures against a specific risk factor. The underwriter would evaluate the individual risk factor and write a policy accordingly.

In 1992 there were $15.5 billion damages because of Hurricane Andrew in Florida causing seven U.S. insurance companies bankrupt.

Additional Types of Reinsurance:

Proportional Reinsurance

The reinsurer will receive an allocated share of the premiums of all the policies sold by the insurance company being covered. When claims are made, the reinsurer will also take a portion of the losses. In a proportional coverage, the reinsurance company will also reimburse the insurance company for all processing, business acquisition and writing costs.

Non-proportional Reinsurance

In this coverage, the reinsurer will only get involved if the insurance company’s losses exceed a specified amount, which is referred to as priority or retention limit. Accordingly the reinsurer does not have a proportional share in the premiums and losses of the insurance provider. The priority limit may be based on a single type of risk or an entire business category.

Risk-Attaching Reinsurance

Under this type of contract, all policy claims that are made during the effective period of the reinsurance coverage will be covered, regardless of whether the losses occurred outside the coverage period.

Loss-occurring Coverage

Loss-occurring coverage is under the treaty coverage. The insurance company can claim all losses that occur during the reinsurance contract period. The important factor to consider is when the losses have occurred and not when the claims have been made.

Excess-of-Loss Reinsurance

This is a form of non-proportional coverage. The reinsurer will only cover the losses that surpass the insurance company’s certain limit. This type of contract it’s unique because is typically applied in catastrophic events.

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