What are the main type of Reinsurance?
When credit insurers are confronted with default, reinsurance helps to smooth the loss impact. The loss ratio of an individual credit insurer tends to vary even more than that of overall market.
It requires transfer of risk through reinsurance. Reinsurance lowers the cost of capital of credit insures by reducing their earnings volatility.
Types of Reinsurance:
There are two types of reinsurance i.e., proportional and non-proportional. The insurer and the reinsurance share premiums and losses at a contractual defined ratio under proportional reinsurance.
A treaty is set for an amount up to which the direct insurer will pay all losses and reinsurer pays all or predetermined percentage of losses above this amount upto a cover limit.
The reinsurance is feasible through equity, debt and hybrid securities. Non-proportional reinsurance protects against exceptionally large losses.
The advantage of reinsurance is that it is indemnity base and has no basis risk. Hedging tools leave the insurer exposed to the risk that the losses it incurs will not be covered.