Definition
Priority (Reinsurance) refers to the amount of risk or loss that a reinsured company retains before receiving reinsurance coverage. In simpler terms, it’s the portion of risk an insurer keeps for their own account, while any excess loss is passed on to reinsurers. This can also be termed as “retention.”
Meaning
In the context of reinsurance agreements, priority functions similarly to a deductible in primary insurance. It’s the pre-defined claim amount that the primary insurer must cover before the reinsurance starts to pay.
Etymology
The term “priority” originates from the Latin word prior, meaning “former” or “preceding in importance”; it suggests that this portion of risk precedes the responsibility of any reinsurer. “Retention” is derived from the Latin retinere, meaning “to hold back.”
Background
The reinsurer and the insurer design the priority level based on a variety of actuarial evaluations and their respective risk appetites. This technique balances the risk portfolio by allowing insurers to transfer part of their risk to another entity.
Key Takeaways
- Retention Level: Defines the amount of loss the primary insurer must handle before the reinsurer’s role starts.
- Risk Management: Helps insurers manage large and unexpected losses by spreading risk.
- Structured Agreements: Reinsurance treaties contain detailed priority levels to dictate how and when the reinsurer comes into play.
Differences and Similarities
- Similarity: Both “priority” and “retention” are synonymous and often used interchangeably within the insurance domain.
- Difference: Priority typically relates to the specific amount preceding reinsurance activation, whereas retention can broadly include any reserved risk handled internally by an insurer.
Synonyms
- Retention
Antonyms
- Non-Retention
- Full Risk Transfer
Related Terms
- Deductible: The amount an insured must pay out of pocket before insurance kicks in.
- Excess of Loss: Insurance that provides coverage for losses that exceed a specified limit.
- Quota Share Reinsurance: A treaty whereby the insurer and reinsurer share premiums and losses in a pre-defined ratio.
Frequently Asked Questions
What is the difference between priority and deductible?
Answer: Both serve similar functions but in different contexts. Deductibles apply to primary insurance policies, while priority applies within reinsurance agreements.
Why is setting a priority important in reinsurance?
Answer: Establishing a priority helps distribute and manage risks, ensuring financial stability for the insurer by allocating excessive loss portions to reinsurers.
How is priority/retention calculated?
Answer: It is usually calculated based on the insurer’s financial strength, risk assessment, and reinsurance agreement terms.
Exciting Facts
- Reinsurance can cover risks such as natural disasters that a single insurer might find overwhelming to handle alone.
- The concept of reinsurance dates back to the late 14th century in Europe.
Quotations
“Insurance is the first line of defense for risk, but reinsurance is its shield and armor.” — Anonymous
Proverbs
“Divide the risk, harvest the security.” — Unknown
Humorous Sayings
“Priority in reinsurance is like deciding to share your dessert– you handle the crumbs, they take the chunks!”
Government Regulations
Regulations surrounding reinsurance and retention vary globally but generally focus on maintaining the insurer’s capital adequacy and financial soundness under frameworks such as Solvency II in the EU and federal/state legislation in the U.S.
Literature and Further Studies
- 📖 “The Basics of Reinsurance” by Christopher Hall – a comprehensive guide to understanding reinsurance.
- 📊 “Risk Management and Insurance” by Scott E. Harrington & Gregory R. Niehaus – an academic text detailing various aspects of insurance and risk management.
Thank you for diving deeper into the concepts of insurance and reinsurance with us! Remember, just like insurance shields an insurer, knowledge shields you from misconceptions. Keep learning and keep prospering! 🚀💡
All the best,
Jonathan Meade
