Glossary

A reinsurance commission is the percentage of premium paid to the reinsurance intermediary; a ceding company expense. Compare to ceding commissions, which are an expense to the assuming reinsurer. It is also a profit commission paid to the cedent or the intermediary by the retrocessionaire.

Reinsurance confirmation refers to evidence of pro rata or excess of loss reinsurance. A contract of adhesion, issued by the reinsurer confirming acceptance of risk. To be attached to the master facultative reinsurance certificate (cover note) issued by the intermediary.

Reinsurance credit is credit taken in an annual statement by a ceding insurer for reinsurance premiums ceded and for reinsurance losses recoverable.

A reinsurance facility, generally an unincorporated, nonprofit entity, is utilized for auto insurers that provide coverage and service claims. Two states—North Carolina and New Hampshire—use a reinsurance facility. After issuing a policy, an insurer may decide either to handle the policy as part of its regular voluntary business or to transfer it to the reinsurance facility or pool. An insurer is permitted to transfer or "cede" to the pool a percentage of its policies. Premiums for this portion of business are sent to the pool, and these insurance companies then bill the pool for claims payments and expenses. Profits or losses are shared by all auto insurers licensed in the state.

Reinsurance hedging strategy optimization is the determination of the optimal reinsurance/hedging program, reflecting program costs and risk reduction capability; usually conducted through candidate analysis. The risk reduction capability manifests itself in terms of both reduction in required economic capital and reduction in the cost of capital or required risk-adjusted rate of return.

Reinsurance intermediaries are brokers who act as intermediaries between reinsurers and ceding companies. For the reinsurer, intermediaries operate as an outside sales force. They also act as advisers to ceding companies in assessing and locating markets that meet their reinsurance needs.

A reinsurance pool is a risk financing mechanism used by insurance companies to increase their ability to underwrite specific types of risks. The insurer cedes risk to the pool under a treaty reinsurance agreement. The insurer may be a part owner of the pool and may assume a quota share of the pool risk. A captive reinsurance pool may be owned by the original insureds. Some pools are operated by states to provide capacity for hard-to-place risks.

Reinsurance premium is the premium paid by the ceding company to the reinsurer in consideration for the liability assumed by the reinsurer.

Reinsurance recoverable refers to the amount of an insurer's incurred losses that reinsurers will pay. May require collateralization if the cedent is to record the recoverable as an asset for statutory reporting purposes.

A reinsurance sidecar is a limited purpose reinsurance company that provides insurers and reinsurers with alternative capital to reduce earnings and capital volatility developed in response to hurricanes and other catastrophes. Like traditional reinsurers, the sidecar reinsurer assumes a portion of the ceding company's underwriting risk (including losses and expenses) in exchange for a like-percentage premium (hence the term "sidecar"). The sidecar reinsurance agreement is typically a quota share agreement. Sidecars are usually set up by an affiliated insurer or reinsurer and capitalized by equity and debt financing (often from hedge funds). The capital is invested and used to pay claims. Funds are also returned to the affiliated company to pay debt interest and shareholder dividends. Sidecars differ from traditional reinsurance in that (1) they are privately financed; (2) they exist for a defined risk period and finite lifetime (usually 24 months or less); (3) their risks are defined and limited; (4) they are typically limited to a single cedent; and (5) they do not have an active management group or staff. Since they are tailored to a specific cedent's needs, capital is determined after modeling the risks. Also, without active management, sidecars are strictly bound to their contractual terms.