Team 4: Alayne Becker, Nick Chernick, Yu Fan, Sam
Houseworth, Spike Knickel, Justin Newlen, Beth Sanger, Yifan
• What is it?
• Reinsurance is insurance for insurance
• It allows insurance companies to pass some or
all insurance risks to another company
• Parties involved
• The “ceding company” is the company that is
passing the risk to the other company
• The “reinsurer” is the company accepting the
risk from the ceding company
Net Amount At Risk (NAR)
• Equal to the death benefit minus the reserve.
• Death benefit: amount of money the company pays
out when someone dies
• Reserve: funds created for the purpose of paying
anticipated claims under insurance policies
• Example: If the death benefit on an insurance
policy is $50,000 and the insurance company
holds a reserve of $15,000 then the NAR would
be $35,000.
Retention Limit
• Maximum amount willing to be lost by a
company when an insured dies
• Applies for total net risk of all policies on one
• Doesn’t just apply to death benefits, but also can
be used with disability, critical illness, accidental
death and waiver of premium benefits
Reinsurance Treaty
• What is it?
• It is the contract between the two insurance companies that lay
out how the reinsurance will work
• It defines which business is to be reinsured, what premiums must
be paid, what benefits the reinsurer must pay, and how to handle
some common problems that may occur.
• Two primary approaches to define which policies are to reinsured
• Automatic reinsurance
• The treaty defines which products or classes of business are to be
automatically reinsured
• Facultative reinsurance
• The treaty defines which policies can be selectively reinsured, one
policy at a time
Automatic Reinsurance
• The ceding company cannot choose which policy to be
reinsured, and the reinsurer must reinsure all the policies
that meet the treaty.
• Usually 2 Different Types:
1. Excess - Only reinsure the portion of the net
amount at risk that is over the company’s retention
2. First Dollar - Also called the First dollar quota share.
It is the opposite of “Excess”. Reinsure a percentage
of the risk from the very first dollar of death benefit.
Excess vs. First Dollar
The retention limit is 1,000,000, the quota share reinsured on a first dollar basis is 50%,
and the quota share retained is 50%.
Policy 1
Policy 2
Net Amount at Risk
Amount Retained
Amount Reinsured on a
First Dollar Basis
Amount Reinsured on an
Excess Basis
Facultative Reinsurance
• 3 steps
1. Send underwriting information to reinsurers
for review
2. Reinsurers review the information and
decides whether or not to reinsure the risk
and at what price
3. The company reviews all offers. Usually "first
in, best offer" chosen.
• The company takes back some of the risk
• In less developed markets, often treaties give the company an
annual right to recapture
• Restricts use of reinsurance; viewed as a one-year agreement
• In more developed markets, very restrictive recapture
• Typical Examples
• Not allowed or only after a certain number of years
• Not allowed unless the company kept its full retention at issue
• Amount limited to the increase in the company's retention limit
since issue
• Valuable option
Expense Allowance
• Paid by reinsurer to reimburse company
for expenses on the business insured.
• Reinsurers often asked to compete on
expense allowances instead of reinsurance
premium rates.
• Usually expressed as percentages of
reinsurance premiums.
Yearly Renewable Term
• Premium and death benefit
• Yearly - premiums are paid once a year and rates
might change
• Renewable - Ongoing contract
• Term - Only mortality risk is reinsured
• YRT Premium Rates
100% of mortality or 80% of mortality and
some expense allowance
0 1st year rate or lower percentage renewal
• Simplest and Purest Form of Reinsurance
• Risk is Shared from Ceding Company to Reinsurer
• Mortality, Investment, and Persistency are Transferred to
• Two Variations
1. Modified Coinsurance
Ceding Company Pays Interest for "Protection" from
2. Coinsurance With Funds Withheld
Reinsurer Withholds Assets of Ceding Company, Held in a

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