AUTOMATIC PROPORTIONAL REINSURANCE Meaning and
Definition
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Automatic proportional reinsurance is a specific type of reinsurance agreement between two insurance companies or entities, wherein the reinsurer agrees to assume a certain proportion or percentage of the risks or liabilities of the reinsured company automatically, without the need for individual negotiation or approval for each specific contract or policy.
In this type of arrangement, the reinsurer typically agrees to accept a predetermined percentage or share of the reinsured company's premiums and claims. The reinsured company, also known as the cedent, automatically cedes a portion of its risks to the reinsurer based on a predefined formula or agreement.
Automatic proportional reinsurance provides a convenient and efficient way for insurance companies to mitigate their risks and manage their overall exposure. The automatic aspect of this reinsurance means that the cedent can transfer risks to the reinsurer without having to negotiate specific terms and conditions for each individual policy.
This type of reinsurance arrangement allows for the sharing of risks and loss protection between the reinsurer and cedent, helping to stabilize the financial position of the cedent and providing an additional layer of security. It also allows the reinsurer to diversify its portfolio by assuming a portion of risks from multiple cedents.
Overall, automatic proportional reinsurance helps insurance companies manage their risk exposure more effectively and efficiently by automatically transferring a predetermined proportion of their risks to another party, enabling both parties to benefit from the sharing of risks and premiums.
