Delving into Reinsurance Ceded: Meaning, Varieties, and Contrasts with Reinsurance Assumed

Reinsurance ceded and reinsurance assumed are two important concepts in the insurance industry. They involve the transfer of risk from one insurer to another. Let's delve into these terms, understand their meanings, explore their varieties, and contrast them:

Reinsurance Ceded:

Meaning:Reinsurance ceded, often simply called "ceding," refers to the practice of an insurance company (the cedent) transferring a portion of its insurance liabilities, risk exposure, or premiums to another insurance company (the reinsurer). This transfer is done to manage and reduce the potential financial impact of large claims or to maintain a more favorable risk profile.

Varieties of Reinsurance Ceded:

• Proportional Reinsurance: In proportional reinsurance, the cedent and the reinsurer agree to share both premiums and losses in a predetermined proportion. This arrangement can be on a "quota share" basis (e.g., the reinsurer covers 30% of all policies and claims) or an "excess of loss" basis (e.g., the reinsurer covers losses above a certain threshold).
• Non-Proportional Reinsurance: In non-proportional reinsurance, the cedent retains all premiums but seeks coverage from the reinsurer only when losses exceed a certain threshold (the "retention limit"). The reinsurer then pays for the losses exceeding this limit, up to a maximum defined in the contract.

Reinsurance Assumed:

Meaning:Reinsurance assumed is the perspective of the company that agrees to accept the risk from another insurer, acting as the reinsurer. When an insurance company enters into a reinsurance assumed agreement, it is agreeing to take on a portion of the risk and liabilities from the ceding insurer.

Varieties of Reinsurance Assumed:

• The varieties of reinsurance assumed correspond to the varieties of reinsurance ceded mentioned above:
  • In proportional reinsurance assumed, the reinsurer agrees to cover a portion of the ceding company's risks, and both the ceding company and the reinsurer share premiums and losses based on a predetermined agreement.
  • In non-proportional reinsurance assumed, the reinsurer agrees to cover losses for the ceding company, but the ceding company retains all the premiums.

Contrasts Between Reinsurance Ceded and Reinsurance Assumed:

1. Perspective:

   • Reinsurance ceded is from the perspective of the ceding insurer, which is transferring risk.
   • Reinsurance assumed is from the perspective of the reinsurer, which is accepting and assuming risk from another insurer.

2. Direction of Risk Transfer:

   • In reinsurance ceded, the risk is transferred away from the ceding insurer to the reinsurer.
   • In reinsurance assumed, the risk is transferred from another insurer to the reinsurer.

3. Ownership of Premiums:

   • In reinsurance ceded, the ceding insurer may share premiums with the reinsurer based on the agreed-upon arrangement.
   • In reinsurance assumed, the reinsurer may receive premiums from the ceding insurer, depending on the type of reinsurance agreement.

4. Financial Impact:

   • In reinsurance ceded, the ceding insurer is looking to reduce its potential financial exposure to large claims and improve its risk management.
   • In reinsurance assumed, the reinsurer is looking to expand its business, potentially diversify its portfolio, and generate premium income by assuming the risk from other insurers.

5. Regulatory Considerations:

   • Both reinsurance ceded and reinsurance assumed can have regulatory implications, particularly regarding capital requirements and solvency.

In summary, reinsurance ceded and reinsurance assumed are complementary practices within the insurance industry. Reinsurance ceded involves an insurer transferring risk to another party, while reinsurance assumed involves an insurer accepting risk from another party. The specific type and terms of the reinsurance agreement can vary widely and depend on the needs and strategies of the parties involved.