There are two main types of reinsurance.
- Facultative reinsurance — this is for a large or unusual risk, such as a very big building or a very large amount of life insurance on one person; it is called facultative, since each insurer has the faculty or privilege to decide if it wants to enter into this type of contract for a specific risk.
- Treaty reinsurance — also called automatic reinsurance, this is when the originating insurer agrees in advance to cede (transfer) many risks to a reinsurer —and the reinsurer agrees in advance to assume (take) the risks. For example, XYZ Insurance Company purchases treaty reinsurance to protect itself if the storm losses to buildings and cars in a particular state during a specific year exceeds a certain amount — $50,000,000 for instance. If the losses exceed that amount, the reinsurer will reimburse the originating company.