Outwards Reinsurance

The cedent is the insurance company that transfers risk to a reinsurer.

Inward insurance refers to the insurance business that a company underwrites from its clients, essentially the policies it sells and the risks it assumes. Outward insurance, also known as reinsurance, occurs when an insurance company transfers a portion of its own risks to another insurer (a reinsurer) to reduce its exposure to large losses.

Inward insurance represents the company’s primary business, while outward insurance helps manage and spread its risks. Both are integral parts of an insurance company’s risk management strategy.

Understanding the difference between insurance and reinsurance is crucial for effective risk management strategies, as both play distinct yet complementary roles in the insurance industry.

Outward reinsurance premiums are what the cedent (the primary insurer) pays to the reinsurer for a reinsurance contract. These are the cost of risk transfer and are dependent on the type of reinsurance, volume of risk ceded and expected claims frequency and severity.

Outward reinsurance, also known as ceding reinsurance, is the practice whereby an insurance company (the cedent) transfers a portion of its risk portfolio to another insurance company (the reinsurer). This transfer helps the original insurer manage its risk exposure, stabilise its financial performance, and increase its underwriting capacity.

Proportional Reinsurance: The reinsurer receives a fixed percentage of premiums and pays the same percentage of claims.

• Quota Share: A fixed percentage of every policy is reinsured.
• Surplus Share: Only the portion of risk that exceeds a certain retention limit is reinsured.

Non-Proportional Reinsurance: The reinsurer only pays if losses exceed a certain threshold.

• Excess of Loss: The reinsurer covers losses that exceed the cedent’s retention up to a specified limit.
• Stop-Loss: The reinsurer covers losses that exceed a predetermined amount of total losses.

Risk management: by ceding a portion of their risks, insurers can protect themselves from large losses due to catastrophic events or significant claims.
Capital relief: reinsurance allows insurers to reduce the amount of capital they need to hold against potential losses, thereby improving their financial ratios and solvency.
Capacity expansion: reinsurance enables insurers to underwrite more business than their own capital base would allow, increasing their capacity to take on new policies.
Stabilising results: reinsurance helps insurers smooth out their financial results by mitigating the impact of large, unexpected claims.