This presentation is part of: M41-1 (2072) Emerging Issues In Finance And Financial Reporting in Central and Eastern Europe - II

Reinsurance of Commercial Insurance Companies: A Czech View

Jirina Boksova, Ph.D., Department of Financial Accounting and Auditing, University of Economics Prague, W. Churchill Square 4, Prague 3, 130 67, Czech Republic

The main aim of this paper is to present the actual problems in reinsurance of commercial companies in the Czech Republic. Reinsurance represents a transfer of risk arising from a insurance agreement between insurance company and reinsurer. The insurance company pays reinsurance premium for the transfer of risk to a different subject. Insurance companies usually keep a part of risk from insurance agreements. The remaining risk, limited to a certain level of the reinsurer, becomes the object of reinsurance. When the insured accident occurs, the insurance company does not cover the whole insured sum from own resources (depending on the contract) but the reinsurance company participates as well. By taking over the liabilities, the reinsurer disengages insurance capacity and reduces the risk of an insurance company to an adequate level. In cases, when the reinsurance company considers it is not possible to cover the risk on its own, the reinsurer can cede a part of the risk to another reinsurer (retrocession).

From the financial reporting point of view (given by IFRS 4, or Czech GAAP), it is differentiated between active reinsurance, which is reported by the reinsurer as direct insurance, and passive reinsurance, which consist of operations when the insurance company transfers a part of risk into reinsurance.

Pro-rata reinsurance is characterized by an insured sum and premium divided between an insurance company and reinsurance company by a ratio specified in the contract. The compliance with the reinsurer’s limit appears in two forms: quota and excedent. However, in practice the combination both quota and excedent reinsurance occurs in order to take advantage resulting from both types of pro-rata reinsurance. These are mainly positive financial effects of quota reinsurance and homogenizing effects on insurance files by excedent reinsurance. An insurance company can get the best benefits and protection only in case it has a high-quality insurance programme. Therefore Czech insurance companies have to consider administrative requirements of a reinsurance programme, the core set of insurances, the reinsurance price, development of a company and its preferences, internal policy and reliability. Suitability and quality of a reinsurance programme significantly affects the insurance company’s results.


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