Reinsurance & capacity
Reinsurance is insurance for insurers — and for an MGA it answers the all-important question: who backs the paper? All STABLE.
What reinsurance is
Section titled “What reinsurance is”A ceding company (the original insurer) transfers part of its risk to a reinsurer. The reinsurer takes a share of premium in exchange for taking a share of losses. (A reinsurer can itself buy retrocession — reinsurance for reinsurers.) STABLE
Insurers reinsure to:
- add capacity — write larger/more policies than their own surplus would allow,
- stabilize results — smooth out big swings in losses,
- gain surplus relief — improve their balance-sheet capacity,
- buy catastrophe protection — cap exposure to a single huge event.
Treaty vs facultative
Section titled “Treaty vs facultative”- Treaty reinsurance — covers a whole book/class automatically under one agreement (the reinsurer takes all risks that fit the treaty).
- Facultative reinsurance — negotiated one risk at a time (for unusual or very large individual risks).
Proportional vs non-proportional
Section titled “Proportional vs non-proportional”- Proportional (pro rata) — reinsurer shares premium and losses in a set
proportion:
- Quota share — a fixed % of every risk (e.g., reinsurer takes 50% of premium and 50% of losses).
- Surplus share — the cedent keeps risks up to a retention; the reinsurer takes the surplus above it.
- Non-proportional (excess of loss) — reinsurer pays only above an attachment
point:
- Excess of loss (XoL) — reinsurer pays losses above a retention, up to a limit.
- Stop-loss / aggregate — reinsurer pays once aggregate losses exceed a threshold (often expressed as a loss-ratio point).
Why this is the “capacity” layer of the MGA stack
Section titled “Why this is the “capacity” layer of the MGA stack”An MGA doesn’t carry the risk on its own balance sheet — it needs a capacity provider: a fronting/admitted carrier that issues the paper, usually backed by reinsurers who supply the actual capital. This is layer 3 of the delegated-authority stack.
How the loss ratio drives capacity
Section titled “How the loss ratio drives capacity”Reinsurers and fronting carriers decide whether to back (and renew) a program largely on its loss ratio (see 03 Loss ratio & combined ratio):
- a low, stable loss ratio → easy to attract and keep capacity → the program can grow;
- a high/volatile loss ratio → capacity dries up, terms tighten, or the program is non-renewed.
This is precisely why Glacis’s evidence layer matters to the business, not just the customer: better selection → lower loss ratio → more durable capacity → a bigger, more defensible book. See 01 The flywheel.
Connection to surplus lines
Section titled “Connection to surplus lines”For a novel AI Tech E&O risk written non-admitted, the capacity often comes from E&S carriers and specialty reinsurers comfortable with freedom-of-rate-and-form risk. See 06 Surplus lines / E&S.
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