A comprehensive breakdown of how reinsurance works — treaty vs. facultative structures, proportional vs. excess of loss contracts, the Big Three (Munich Re, Swiss Re, Berkshire), the retrocession market, and the generational hard market of 2023.
Educational content only — not personalized financial, legal, or tax advice.
Primary insurance breaks down when faced with low-frequency, high-severity systemic shocks. A Category 5 hurricane, a pandemic, a major cyberattack — events that could wipe out a carrier's entire surplus. To protect their balance sheets, primary insurers transfer a portion of their risk to the reinsurance market — 'the insurance of insurance.'
Treaty: Obligatory, portfolio-wide. The reinsurer automatically accepts all risks within a specified book meeting predefined criteria. No individual submission required. Efficient for high-volume, homogeneous risks.
Facultative: Case-by-case negotiation. Reserved for exceptional exposures outside treaty parameters: deepwater oil rigs, nuclear facilities, ultra-high-net-worth properties. Labor-intensive but precisely tailored.
Quota Share (proportional): Reinsurer takes 60% of both premiums and losses. Reinsurer pays a ceding commission offsetting the primary carrier's acquisition costs. Used for capital relief.
Excess of Loss (non-proportional): Reinsurer only pays after losses exceed the retention/attachment point. Example: $100M XOL with $50M retention — storm causes $120M in losses: primary pays $50M, reinsurer covers $70M. Used for catastrophe protection.
At January 2023 renewals, property catastrophe rates jumped 30-50% in high-risk territories — sharpest increases in two decades. More importantly, reinsurers shifted attachment points dramatically upward — forcing primary carriers to double or triple retention. Effect: primary insurers absorbed all medium-severity weather events, with reinsurance only kicking in for truly catastrophic events. This forced primary carriers to reprice consumer policies sharply or exit markets entirely. See uninsurable world).