Priority

Priority In reinsurance, priority refers to the sharing of losses between the insurer (ceding company) and the reinsurer. It dictates the order in which each party bears the financial burden of a covered loss. There are two main types of reinsurance treaties that utilize priority: 1- Excess of Loss (XL) Reinsurance: Here, the priority is a specific dollar amount (deductible) that the ceding company must pay for each and every covered loss. Scenario: Imagine a reinsurance treaty with a $50,000 excess of loss (XL) clause. If an insured event results in a $100,000 loss, the ceding company would first pay the initial $50,000 (priority/deductible). The reinsurer would then cover the remaining $50,000 2- Stop-Loss Reinsurance: In this type of reinsurance, the priority is an aggregate loss limit for a defined period (e.g., annual). Scenario: Let's say a stop-loss treaty has a $1 million annual loss limit. The ceding company retains responsibility for all covered losses throughout the year up to that $1 million threshold. Once the cumulative losses reach $1 million, the reinsurer starts to cover any additional losses that occur within the policy period. Key Points on Priority in Reinsurance: -Priority determines how much of a loss the ceding company absorbs before the reinsurer becomes financially responsible. -It allows the ceding company to retain some control over smaller claims while sharing the burden of larger losses with the reinsurer. -The specific priority amount (deductible for XL or limit for Stop-Loss) is negotiated between the ceding company and the reinsurer and outlined in the reinsurance treaty. Priority can also be applied on a per risk basis, meaning separate deductibles or limits may be established for individual large or complex risks within the reinsurance agreement. Some reinsurance treaties might combine elements of both XL and Stop-Loss structures, creating a multi-layered approach to risk sharing. In conclusion, priority in reinsurance plays a crucial role in allocating financial responsibility for losses. It establishes a clear division between what the ceding company retains and what the reinsurer covers, ensuring a balanced risk-sharing arrangement for both parties. #BeNewinsurance #InsurTech #inclusiveinsurance #insurance #reinsurance #takaful