¶ … Reinsurance For many people, the field of insurance can be very confusing. This is because these organizations will often engage in activities that are designed to reduce risks. Recently, there have been a number of incidents that have led to an increase in liabilities for these firms. The thesis statement will focus on the four different types and the impact of a large natural disaster (i.e. The Japanese tsunami of 2011).

The purpose of this assignment is to understand the strategies that reduce risks and the way they are utilized. This will be accomplished by focusing on: reinsurance methods for sharing in the losses, the excess of loss treaty, the quote share treaty, facultative reinsurance, the surplus -- share treaty and the methods used after the Japanese tsunami. Together, these factors will explain the different tactics utilized in reducing risks and dividing the liabilities among various firms. ("Definition Reinsurance," 2013)

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Reinsurance methods for sharing losses

There are four basic methods that are used for sharing in losses these include: the excess of loss treaty, the quote share treaty, facilitative reinsurance and the surplus -- treaty share techniques Each one of these areas is providing carriers with different strategies they can use to reduce risks .(Wollan, 2002)

Excess loss of treaty

The excessive loss of treaty is specifically based upon a predetermined figure. This is designed to make the entire liability less by having each carrier responsible for a specific amount. In general, this is a normal strategy that is used by the majority of carriers to reduce risks. (Wollan, 2002)

Quota share treaty; premiums and losses

Quote share treaty is when the company that is reinsuring another carrier will share in a percentage of the risks, premiums...

This is applied to the carrier's net retained account. Under these calculations, everything is taken into consideration in order to determine the excess of the loss from the catastrophe. (Wollan, 2002)
Facultative reinsurance

Facilitative insurance is when each contract that is reinsured is negotiated separately with different carriers. This is designed to reduce risks and the costs of covering adverse events (which have the possibility of leading to large payouts for customers after a major incident). It is at this point when the losses for the different carriers are reduced by spreading out the liabilities between them.

Surplus -- share treaty

Treaty reinsurance is when different carriers will negotiate a number of events that are covered under one contract. This streamlines the process of reducing risks and allowing the various companies to create an arrangement that will improve their ability to control their liabilities from these events. When this happens, firms can effectively determine the costs of covering specific disasters and offering customers with solutions that will increase their protection. (Wollan, 2002)

Reinsurance methods for sharing losses and the Japan tsunami of March 11, 2011

The Japanese tsunami was the fourth largest earthquake ever recorded. In a report conducted by Aon (2011) they found that these costs are much higher than anyone inside the industry expected. Evidence of this can be seen with the report saying, "The Japanese government currently estimates total economic losses from the Tohoku EQ in March of this year to range between JPY16 to 25 trillion (USD185 to 308 billion), or 3.4 to 5.6% of GDP. In July 2011, the government reported that JPY23 trillion (USD291 billion) would be spent on reconstruction costs for the affected regions. Impact Forecasting estimates…