Spot Reinsurance

A reinsurance agreement that covers a single peril. Spot reinsurance is a used in facultative reinsurance agreements, and allows a ceding company to obtain reinsurance coverage in situations in which a subsection of its total portfolio is considered more risky than the portfolio as a whole.

Insurance companies enter into reinsurance agreements in order to reduce their risk exposure, and pay reinsurance companies to take some (or all) of their underwriting risk off their books. Reinsurance agreements may cover an entire line of business or may cover specific policy types, and may allow the reinsurer to be selective when it comes to which perils it accepts (facultative reinsurance) or may require the insurer to accept a peril automatically (treaty reinsurance).

Facultative reinsurance agreements allow the reinsurer to be more selective, but also allow a ceding company to obtain coverage that may be outside of the bounds of the terms and conditions of treaty reinsurance. For example, an insurance company may underwrite flood insurance policies across a wide geographic area, but may have underwritten a small set of policies that carry more risks than the average policy in the portfolio. Losses associated with this small set of policies may push the ceding company’s aggregate coverage over its limit.

Ceding companies can purchase spot reinsurance to cover policies using a limit other than what is granted for its portfolio as a whole. It may be purchased to cover a specific peril or location, and can be as specific as covering a single underwritten insurance policy. For example, a company that underwrites automobile insurance policies may purchase spot reinsurance to cover a driver that is considered much more risky than the other drivers that it insures. By separating the risk associated with the more accident-prone driver the insurer reduces the odds that its general portfolio of policies will bump up against its coverage limit.

Insurance companies looking to cede risk to a reinsurer may find that facultative reinsurance contracts are more expensive than treaty reinsurance. This is because treaty reinsurance covers a “book” of risks, which is an indicator that the relationship between the ceding company and the reinsurer is expected to be more long-term than if the reinsurer only dealt with one-off transactions, covering single risks. While the increased cost is a burden, a facultative reinsurance arrangement may allow the ceding company to reinsure risks it may otherwise not be able to take on.