What Are Proportional and Non Proportional Reinsurance Policies?

What Is Proportional Reinsurance?

What Is Non Proportional Reinsurance?

What Is the Difference Between Proportional and Non Proportional Reinsurance?

For understanding all key differentiating factors between proportional and non proportional reinsurance policies, refer to the following table:

Factors

Proportional Reinsurance Policy

Non proportional Reinsurance Policy

Function

The indemnification provisions guarantee the reinsured party a certain percentage of coverage from the reinsurance company if the loss against which the policy was drawn in the first place gets triggered.

A reinsurance company will pay the primary insurer only if the losses incurred by the latter party exceed a specific limit.

Applicability

These policies are more suitable for smaller businesses that operate with fewer resources.

Non proportional reinsurance schemes are perfect for insurers who are confident of indemnifying a large collection of claims and at the same time maintaining their proper course of business without going bankrupt.

Risks

The reinsurance company must pay the policy drawing insurance company for whatever losses they incur through an insured event as per the predetermined margin. So the reinsurer is at greater risk.

As the reinsurance company does not need to pay anything as long as the losses do not cross a ‘priority’ amount, they are susceptible to lesser risk.

Probability of losses

Although proportional reinsurance policies are more prone to get triggered, the loss associated with a single event proves to be less costly for the reinsurance firm.

Non proportional reinsurance policies bring in more uncertainty and higher costs for the reinsurance companies.

What Is the Importance of Proportional Reinsurance?

Let us understand more with an example:

What Is the Importance of Non Proportional Reinsurance?

FAQs on Proportional and Non-proportional Reinsurance

What are the two types of proportional reinsurance? up-arrow

Two common types of proportional reinsurance policies include quota share and surplus share. In the first case, the reinsurer and the ceding company share losses and premiums as per a predetermined percentage. Here, a primary insurance company shares a considerable portion of its risk with its preferred reinsurance partner.

In a surplus treaty, a ceding firm establishes the maximum loss it can bear in a policy term. Every risk that demands coverage above the retained line is proportionately shared with the reinsurance company. This proportion is subject to vary as per the size of the risk.

What are the types of non proportional reinsurance? up-arrow

The main types of non proportional reinsurance policies comprise stop loss and excess of loss plans. In the case of stop-loss reinsurance, the reinsurer will cover any losses incurred by the primary insurer in a given year that exceed a predetermined percentage of earned premiums.

Whereas excess of loss reinsurance is a traditional reinsurance contract where the reinsurer defends the ceding firm against losses that surpass a certain threshold.

Is facultative reinsurance proportional or non-proportional? up-arrow

Both facultative and treaty reinsurance contacts can be proportional or non-proportional or even a combination of both. The nature of reinsurance should be decided based on what risks you wish to avoid.