Reinsurance broking concepts
Reinsurance broking has its own vocabulary, and most of it is old. Nextera Bright is organised around that vocabulary rather than around a generic CRM or accounting model, so this page is worth reading before you open the product.
Who is who
Section titled “Who is who”Reinsurance is insurance bought by an insurer.
| Party | Role |
|---|---|
| Original insured | The policyholder whose risk started the chain |
| Cedant (or ceding company) | The insurer that issued the original policy and now wants to pass on part of the risk |
| Reinsurer | The party accepting that risk |
| Reinsurance broker | The intermediary that structures and places the risk with reinsurers on the cedant’s behalf |
| Retrocessionaire | A reinsurer’s reinsurer — the same relationship, one level up |
A broker sits between two counterparties and owes duties to both directions of the relationship, which is why almost every record in a broking system has a “which party” axis and why balances have to be tracked per party rather than netted.
Ceding is passing risk on. A cession is the portion passed. Retention is what the cedant keeps for its own account. Those three words appear constantly and mean exactly what they say.
Facultative versus treaty
Section titled “Facultative versus treaty”This is the first fork, and it determines almost everything downstream.
Facultative reinsurance covers a single risk, negotiated individually. The reinsurer assesses that one risk and chooses whether to accept it — the word means “optional” for exactly that reason. Used for large, unusual or excluded risks that fall outside a treaty. Each facultative placement has its own slip, its own terms and its own cessions.
Treaty reinsurance covers a portfolio of risks under a standing agreement. The cedant does not offer risks one at a time and the reinsurer does not select individually: risks falling within the treaty’s scope are automatically covered. Treaties are negotiated periodically, usually annually, and renewal is a major event in a broker’s calendar.
The operational difference: facultative is high-touch per risk and low-volume; treaty is low-touch per risk and very high-volume, with the complexity sitting in the programme structure and in the accounting.
Proportional versus non-proportional
Section titled “Proportional versus non-proportional”The second fork determines how losses and premiums are shared.
Proportional (pro-rata)
Section titled “Proportional (pro-rata)”The reinsurer takes an agreed share of premium and pays the same share of losses. If the reinsurer has 30%, it receives 30% of premium and pays 30% of every claim.
- Quota share — a fixed percentage of every risk in the portfolio. Simple, and it cedes good risks along with bad.
- Surplus — the cedant retains a fixed amount (a “line”) and cedes the surplus above it, so the ceded percentage varies by risk size. Lets the cedant keep more of the small risks.
Proportional treaties normally involve ceding commission: the reinsurer pays the cedant a commission for the acquisition and administration costs already incurred on the original business. It is a large number and it is one of the main things technical accounts track.
Non-proportional (excess of loss)
Section titled “Non-proportional (excess of loss)”The reinsurer pays only when a loss exceeds an agreed threshold, and premium bears no fixed relationship to the loss share. Written as layers: “USD 5m excess of USD 5m” means the reinsurer pays the portion of a loss between 5m and 10m.
- Per risk excess of loss — applies to each individual risk.
- Per occurrence / catastrophe excess of loss — applies to the aggregate of losses from a single event, which is how windstorm, flood and earthquake exposure is managed.
- Stop loss / aggregate excess — applies to the cedant’s total losses over a period.
Additional terms you will meet on non-proportional covers: the attachment point (where cover starts), the limit (how much cover), reinstatement (whether the layer refreshes after a loss and at what cost), and the priority or deductible (the cedant’s retained amount below the layer).
The placement lifecycle
Section titled “The placement lifecycle”A placement moves through a recognisable sequence, and this is the sequence Bright’s placement and facultative modules follow:
- Submission. The cedant’s risk information is packaged for the market.
- Slip. The document setting out the risk, the terms and the conditions being offered.
- Quote. Reinsurers respond with terms and an indicative share.
- Firm order. The cedant confirms it wants to proceed at agreed terms.
- Signed lines. Each reinsurer’s final accepted share. If the placement is oversubscribed, lines are signed down proportionally from the written lines.
- Binding. Cover is confirmed and documented.
A placement is complete when 100% of the risk has been placed. Anything less is a shortfall, and it stays with the cedant — which is why tracking written versus signed lines matters operationally rather than just administratively.
Renewal
Section titled “Renewal”Treaties and facultative covers run for a period and then renew. Renewal is not new business: it is a negotiation carried out with the prior year’s terms, loss experience and participations in view. A broking system earns its keep at renewal by making last year’s position visible next to this year’s proposal — which is why Bright treats renewal as a first class module rather than as “create a new treaty”.
Claims and recoveries
Section titled “Claims and recoveries”When a loss hits the original policy, the cedant advises it, and the broker applies it across the cessions to determine each reinsurer’s share. Two things follow:
- Claims advice — notifying each reinsurer of its share of the loss.
- Recovery — collecting that share. Recoveries are tracked per reinsurer, because reinsurers pay at different times and occasionally dispute.
Outstanding claims are notified but unpaid; IBNR is incurred but not reported — losses that have happened but that nobody has told anyone about yet, estimated actuarially.
Technical accounts and settlement
Section titled “Technical accounts and settlement”This is where reinsurance accounting differs most from general accounting.
A technical account is the periodic statement of amounts due between the parties for a treaty or a set of transactions: premiums, ceding commission, brokerage, taxes, claims paid, adjustments. It is prepared per treaty and per period, and it nets to a balance in one direction.
Settlement then reconciles and pays those balances. Three properties make it hard:
- Three parties, two relationships. The broker holds balances with cedants and with reinsurers, and they do not offset against each other.
- Currency. Programmes are frequently multi-currency, and settlement currency is not always the original currency.
- Timing. Technical accounts arrive on different cycles from different counterparties, and aged debt is a genuine operational risk rather than a reporting nicety.
Brokerage is the broker’s own remuneration, normally a percentage of premium, deducted as part of this flow.
Bordereaux
Section titled “Bordereaux”A bordereau is a schedule listing the individual risks or claims under a treaty for a period — premium bordereaux and claims bordereaux. It is how detail moves between cedant, broker and reinsurer under treaty arrangements, where individual risks were never individually notified.
The practical problem is that every counterparty wants a different format. Producing and ingesting bordereaux in each counterparty’s expected layout is unglamorous, high-volume work, and it is a large part of what a broking system does day to day.
How these concepts map to Nextera Bright
Section titled “How these concepts map to Nextera Bright”| Concept on this page | Nextera Bright module |
|---|---|
| Submission, slip, quote, firm order, signed lines, binding | Placement |
| Single-risk placements with their own slip, terms and cessions | Facultative |
| Proportional and non-proportional programme structure and participations | Treaty |
| Carrying prior-year terms and history into the next period | Renewal |
| Claims advice, application across cessions, recoveries per reinsurer | Claims |
| Premiums, ceding commission, brokerage, taxes, adjustments per treaty | Accounting |
| Reconciling and paying balances per counterparty | Settlement |
| Per-risk and per-claim schedules in each counterparty’s format | Bordereaux |
| Production, outstanding balances, aged debt, regulatory returns | Reporting |