When a ceding insurer purchases reinsurance, it generally expects that its reinsurer will respond to the ceding insurer’s claims to the same extent that the ceding insurer covers the underlying claim unless otherwise stated in the reinsurance contract. In other words, ceding insurers often expect back-to-back reinsurance coverage. While this is not true in every reinsurance relationship, it is the case more often than not. This commentary will briefly explore the concept of back-to-back reinsurance coverage.
Back to the Beginning
First, a little Reinsurance 101. There are two basic types of reinsurance: treaty reinsurance and facultative reinsurance. Treaty reinsurance covers a portfolio of insurance policies written by an insurance company and issued to the insurance company’s policyholders. This could include every underlying insurance policy written by the ceding insurer during a year or just a segment of the insurance policies written by the ceding insurer based on jurisdiction or line of business or type of underlying policyholder. On the other hand, facultative reinsurance covers an individual risk insured by a specific insurance policy issued by an insurance company. Because facultative reinsurance generally covers a specific individual risk, the concept of back-to-back reinsurance coverage makes the most sense from a commercial perspective.
