Most companies use reinsurance to shake off risks in their portfolios. They do this in exchange for a part of the premiums they get from issuing policies. Handing over risk to reinsurers is a common affair in the insurance industry. It reduces the exposure to prospective rush for the insurance companies; in this case, ceded reinsurance leverage is required.
Insurance companies try to figure out a way to balance buying reinsurance and covering risk by themselves to avoid depending too much on reinsurance. In this situation, ceded reinsurance leverage acts as an index, allowing the insurance company to remain where it stands. The insurance company ceded ratio affects decisions about further reinsurance purchases.
What is Ceded Reinsurance Leverage?
Ceded reinsurance leverage is the ratio of ceded insurance balances to the policyholder’s excess. It is a calculated ratio used to regulate the extent to which an insurance company depends on reinsurance to cover its risks. This involves ceded reinsurance premiums, policyholder’s excess, unearned commissions and premiums, and net ceded reinsurance offered by non-US affiliations. The higher the ratio, the more the insurance companies depend on security from their reinsurers.
How do insurers manage risk using Ceded Reinsurance Leverage?
Insurance companies use ceded reinsurance leverage as a pressure indicator of how much insurance depends on pushing policy risks to others. Also, a high ratio shows that the company strongly depends on a third party to help discharge risks. A reinsurance company may expose itself to higher risk if it demands more money for assumed risk.
One of the threats to insurance companies future health is the number of reinsurers a company uses during the movement of risks. A high accumulation of ceded insurance among a close group of insurers may lead to a circumstance where companies may be unable to receive it from reinsurance companies. This may be because these reinsurance companies may be unable or unwilling to carry out their obligations. Having high-ceded reinsurance leverage doesn’t mean the insurance company is impotent.
Difference Between Reinsurance Ceded and Reinsurance Assumed
These are actions carried out by two parties assumed in these types of contracts between two different insurance companies. Below are the differences between reinsurance ceded and assumed.
| Reinsurance Ceded | Reinsurance Assumed |
| This action is taken by insurance companies to transfer a part of their responsibility for policy coverage to another insurance company. | This action is taken by an insurance company as an acceptance of the responsibility for coverage from another insurance company. |
Depending on some circumstances, an insurance company is required to carry out any of these actions.
What is a Ceded Reinsurance Leverage Ratio?
The ceded-reinsurance leverage ratio is a measurement of the dependence of an insurance company on reinsurers. It is also a measurement of the possible exposure of an insurance company to invalid reinsurance retrievals.
Benefits of Ceded Reinsurance Leverage
Insurance companies are generally known to be exposed to different types of risks. Reinsurance ceding creates security for the equity, solvency, and stability of ceding insurance companies for undetermined increments in the market. It helps stabilize the industry in times of risk. Ceded insurance allows different insurers to control revenue instability and keep up proper capital reserves.
It will also grant permission to insurance companies with self-determination to insure policies that cover a wide area of risks with no imprudent increase in the cost to cover creditworthiness lines. Reinsurance ceding allows the availability of substantial liquid assets for insurance companies, most often when there are substantial losses. Ceded reinsurance lifts an executive burden for a client. Clients do not need to search around for insurers to offer coverage over risks or protection for business operations.