Ceded Reinsurance Leverage
What Does Ceded Reinsurance Leverage Mean?
Ceded reinsurance leverage is a ratio used to assess the extent to which an insurance company relies on reinsurance to cover its risks. The calculation involves ceded reinsurance premiums, unearned premiums and commissions, policyholders’ surplus, and net ceded reinsurance from non-US affiliations for incurred but not reported (IBNR), paid, and unpaid losses. A higher ratio indicates a greater dependence on the financial security provided by the company’s reinsurers.
Insuranceopedia Explains Ceded Reinsurance Leverage
Insurance companies purchase reinsurance to reduce their overall risk exposure. However, if they rely too heavily on it, they may significantly reduce the profits earned from premiums. To avoid over-dependence on reinsurance, companies aim to strike the right balance between buying reinsurance and covering risks internally. Ceded reinsurance leverage serves as an indicator, helping the company assess its position in this balance. The ratio influences decisions on whether to purchase additional reinsurance.
