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HMRC internal manual

Life Assurance Manual

Reinsurance: Types of life reinsurance contracts

Reinsurance is either:

  • facultative (the reinsurance of an individual risk, negotiated separately for each contract)
  • treaty (for a period of time, with an obligation on the cedant to cede and the reinsurer to accept the specified risks)

Both categories of reinsurance can be arranged on either a proportional or a non-proportional basis.  Proportional reinsurance can either be quota share or surplus and the parties share the premiums and losses between them according to a contractually defined ratio.  For quota share treaties, for example, the reinsurer accepts a percentage of every policy covered in the treaty.  Under non-proportional reinsurance a reinsurer pays a predetermined proportion of the claims which fall between an agreed lower and upper limit of cover. This is known as “excess-of-loss”.  “Stop loss” reinsurance works in a similar way and protects the insurer against catastrophic losses by assuming risks after a certain threshold is reached.

Reinsurance arrangements entered into by general insurers (writing property and casualty business) are typically renewable annually, and many roll over automatically with annual break clauses.  Such transactions dominate the reinsurance industry.  Their tax treatment is described at GIM8000 onwards.

Life insurance risks are fundamentally different because:

  • they are very long-term and
  • many life products consist of investments which have only a small element of insurance risk
  • they may involve ‘deposit back’ or ‘funds withheld’ arrangements LAM10050

Life reinsurance may in some cases relate wholly to insurance risk for example, mortality or disability risk and can disaggregate risks within the policies being reinsured.