Types of Reinsurance of Insurance
Contracts in Ghana
Introduction
Reinsurance is a vital tool for the
stability and growth of the insurance industry in Ghana. It involves the
transfer of risk from one insurance company (the ceding company) to another
insurance company (the reinsurer). This allows insurers to share the financial
burden of large or catastrophic claims, helping to maintain their financial
strength and solvency. In Ghana, reinsurance practices follow global standards,
but also have unique characteristics shaped by the local regulatory framework,
market dynamics, and risk environment. The National Insurance Commission (NIC)
regulates reinsurance in Ghana, ensuring that reinsurance agreements are fair,
transparent, and sustainable.
In this context, it is essential to
understand the various types of reinsurance used by insurance companies in
Ghana. These types of reinsurance arrangements determine how risks are shared
between insurers and reinsurers, the financial exposure of the ceding company,
and the amount of control the ceding company retains over the risk. The two
main types of reinsurance used in Ghana are proportional reinsurance and non-proportional
reinsurance, both of which have subtypes. Each type serves different
needs and offers different benefits, depending on the type of risks involved,
the capacity of the insurer, and the specifics of the insurance contract.
1.
Proportional Reinsurance
Proportional reinsurance is the most
common form of reinsurance in Ghana. Under proportional reinsurance, the ceding
company and the reinsurer share both the premiums and the claims of the insured
risk based on an agreed percentage. The insurer cedes a certain proportion of
the premium to the reinsurer and, in return, the reinsurer agrees to cover a
corresponding proportion of the losses. This arrangement allows the ceding
company to share its risks and reduce its financial exposure.
There are two main subtypes of
proportional reinsurance: Quota Share Reinsurance and Surplus
Share Reinsurance.
a) Quota
Share Reinsurance
In a quota share reinsurance agreement,
the ceding company and the reinsurer agree to share a fixed percentage of both
premiums and claims. For example, if a ceding company has an insurance policy
with a premium of GH₵100,000, and a quota share agreement of 30% with a
reinsurer, the reinsurer will receive 30% of the premium (GH₵30,000) and will
also cover 30% of any claims made on that policy. This method ensures that the
reinsurer assumes a fixed, proportional share of both the insurer's risk and
the premium income.
Advantages:
Provides predictable and stable reinsurance costs and
returns.
The ceding company can offer more competitive
products, as the risk is shared.
Easy to understand and administer, with fixed
percentages for premiums and claims.
Disadvantages:
The ceding company may have to cede a significant
portion of the premium income, which may reduce its profitability.
Reinsurers may not be willing to take on a large
portion of the business without significant due diligence on the quality
of the risk.
b) Surplus
Share Reinsurance
Surplus share reinsurance is a more
flexible form of proportional reinsurance. Unlike quota share reinsurance,
which applies a fixed percentage to all policies, surplus share reinsurance
allows the ceding company to retain a portion of the risk up to a certain
limit, and then cede the excess to the reinsurer. This type of reinsurance is
commonly used for large or high-value risks.
For example, if an insurance company has
a policy with a sum insured of GH₵2,000,000 and the ceding company agrees to
retain GH₵500,000, it will cede the surplus (GH₵1,500,000) to the reinsurer.
The reinsurer’s share is typically determined based on the size of the risk and
the excess amount.
Advantages:
Provides flexibility for the ceding company to retain
a higher portion of the premium on smaller risks while ceding larger or
more complex risks.
Helps in the diversification of risk across different
lines of business.
Allows the ceding company to underwrite large
policies without increasing its exposure significantly.
Disadvantages:
The ceding company may need to monitor and assess
individual risks to determine when the surplus threshold is exceeded,
which can be administratively complex.
Surplus share agreements may not always be as
predictable as quota share reinsurance due to varying levels of risk
retention.
2.
Non-Proportional Reinsurance
Non-proportional reinsurance, also known
as excess of loss reinsurance, differs from proportional reinsurance
in that the ceding company retains a greater portion of the premium and risk,
but the reinsurer only becomes liable once the loss exceeds a certain
threshold, known as the retention level or attachment point. In
non-proportional reinsurance, the reinsurer’s liability is triggered only if a
loss surpasses a certain amount.
Non-proportional reinsurance is typically
used for catastrophe coverage, such as natural disasters, large industrial
accidents, or any event that could result in large financial losses.
There are two main subtypes of
non-proportional reinsurance: Excess of Loss (Catastrophe)
Reinsurance and Stop Loss Reinsurance.
a) Excess
of Loss Reinsurance
Excess of loss reinsurance provides
protection for the ceding company in the event of a large loss. The ceding
company retains the first portion of the loss, and once the loss exceeds this
amount, the reinsurer covers the excess, up to a pre-agreed limit. This form of
reinsurance is particularly useful in protecting against catastrophic losses
that could overwhelm an insurer’s financial resources.
For example, if a ceding company faces a
loss of GH₵10,000,000 in claims due to a natural disaster, and the excess of
loss reinsurance agreement has a retention level of GH₵2,000,000, the reinsurer
will cover any losses above GH₵2,000,000, up to the maximum coverage limit.
Advantages:
Provides protection against large, catastrophic
losses that could threaten the financial stability of the ceding company.
Helps insurers manage risk and limit their exposure
to severe events.
Disadvantages:
Premiums for excess of loss reinsurance can be expensive,
especially in regions prone to natural disasters.
May not be suitable for risks that are frequent but
low in severity.
b) Stop
Loss Reinsurance
Stop loss reinsurance is similar to
excess of loss reinsurance, but it is focused on limiting the total loss
experienced by the ceding company over a specific period, typically a year. The
reinsurer covers any losses that exceed a predetermined percentage of the
ceding company’s total premiums.
For example, if an insurance company’s
total premium income for the year is GH₵5,000,000, and the stop loss
reinsurance contract has a retention limit of 70%, the reinsurer will cover any
losses that exceed GH₵3,500,000.
Advantages:
Protects insurers from cumulative losses over a
period.
Helps insurers maintain financial stability and meet
regulatory requirements.
Disadvantages:
The reinsurer only becomes involved after a
substantial portion of losses have already been incurred, which may limit
the amount of immediate protection for the ceding company.
Stop loss reinsurance is typically more appropriate
for long-tail risks and portfolios of policies rather than individual,
high-value risks.
3.
Facultative Reinsurance
Facultative reinsurance is a type of
reinsurance agreement where the ceding company and the reinsurer negotiate the
terms of reinsurance for each individual risk. Unlike treaty reinsurance, where
the reinsurer automatically covers a portion of every policy written by the
ceding company, facultative reinsurance is more selective and is used for
specific, often large or complex risks.
In Ghana, facultative reinsurance is
commonly used for industrial or commercial risks, such as large-scale
infrastructure projects, where the insurer may need to cede a portion of the
risk to protect its solvency.
Advantages:
Provides flexibility for the ceding company to select
the risks it wants to reinsure.
Reinsurers have greater control over the selection of
risks they are willing to accept.
Disadvantages:
The negotiation process can be time-consuming and
complex, especially for large risks.
Facultative reinsurance is generally more expensive
than treaty reinsurance due to its case-by-case nature.
Conclusion
Reinsurance is a vital mechanism for
managing risk and ensuring the financial stability of insurers in Ghana. The
main types of reinsurance—proportional reinsurance and non-proportional
reinsurance—offer different solutions depending on the needs of the ceding
company and the characteristics of the risks involved. The flexibility of
facultative reinsurance and the shared responsibility of treaty reinsurance
both play key roles in allowing insurers in Ghana to manage their risk
exposures effectively while continuing to offer competitive insurance products.
As the Ghanaian insurance market continues to grow, reinsurance will remain a
crucial tool for enhancing the industry’s resilience against large-scale losses
and promoting sustainable growth.
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