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assume. Reinsurance is also commonly purchased as a financial
tool for providing surplus relief or financing an investment in
new business growth. An insurer’s statutory surplus will usually
decrease under statutory accounting principles when it issues new
policies.5 Although an insurer's assets increase by the amount
of the premiums received on the policy, its liabilities and
expenses increase by a greater amount, due, primarily, to the
insurer’s payment of commissions to its agents on their issuance
of the policy. Reinsurance agreements are commonly used in the
insurance industry to provide the surplus relief for this
depletion.
In the financial setting, the reinsurer generally transfers
up-front capital (a ceding commission) to the ceding company to
cover part or all of the ceding company’s acquisition expense for
the reinsured policies, in addition to reimbursing the ceding
company for some or all of the claims that the ceding company
pays under the policies. The ceding commission is generally the
amount of the surplus relief. Reinsurance is called conventional
reinsurance when the ceding commission equals the ceding
company's acquisition expense plus some profit on the block of
policies insured, and the reinsurer has the right to all future
profits. Reinsurance is called surplus relief reinsurance when
the ceding commission is less then the amount paid under
conventional reinsurance, and the ceding company shares the
5 Statutory surplus equals the insurer's assets minus its
liabilities.
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Last modified: May 25, 2011