What Does Ceded Reinsurance Leverage Mean?
Ceded reinsurance leverage is a ratio calculated to determine the extent to which an insurance company relies on reinsurance to cover its risks. The formula involves ceded reinsurance premiums, unearned premiums and commissions, policyholders' surplus, and net ceded reinsurance from non-US affiliations for incurred but not reported (INBR), paid, and unpaid losses. The higher the ratio is, the greater the insurance company's dependence on security from its reinsurers.
Insuranceopedia Explains Ceded Reinsurance Leverage
Insurance companies buy reinsurance to reduce their overall exposure. However, if they purchase too much, they may cut too much into the profits they make on their premiums. To avoid over-dependence on reinsurance, insurance companies try to find the right balance between buying reinsurance and covering risks themselves. Ceded reinsurance leverage essentially acts as an indicator letting the insurance company where it stands in this equation. The ratio affects the decision to purchase further reinsurance.