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🔗 '''Indemnity-based reinsurance''' is a form of [[Definition:Reinsurance | reinsurance]] in which the [[Definition:Reinsurer | reinsurer's]] obligation to pay is tied directly to the [[Definition:Cedant | cedant's]] actual incurred losses on the underlying [[Definition:Insurance policy | insurance policies]], rather than to an external index, modeled loss, or parametric trigger. This structure ensures that the reinsurer's financial exposure tracks the cedant's real-world claims experience, maintaining a direct economic link between the original risk and its transfer.

⚙️ Under an indemnity-based arrangement — whether structured as [[Definition:Quota share reinsurance | quota share]], [[Definition:Excess of loss reinsurance | excess of loss]], or [[Definition:Surplus share reinsurance | surplus share]] — the cedant reports its [[Definition:Incurred losses | incurred losses]] to the reinsurer, typically through periodic [[Definition:Bordereau | bordereaux]] or individual large-loss notifications. The reinsurer then reimburses the cedant according to the treaty's terms, including any [[Definition:Retention | retention]], [[Definition:Attachment point | attachment point]], or [[Definition:Cession | cession percentage]]. Because payment depends on the cedant's actual claims outcomes, [[Definition:Follow the fortunes | follow-the-fortunes]] and [[Definition:Follow the settlements | follow-the-settlements]] doctrines are central: the reinsurer generally accepts the cedant's good-faith [[Definition:Claims handling | claims handling]] and [[Definition:Claim settlement | settlement]] decisions without requiring independent verification of every claim. [[Definition:Loss adjustment expense (LAE) | Loss adjustment expenses]] may or may not be included in the recoverable amount, depending on how the treaty is structured.

📈 The primary advantage of indemnity-based reinsurance is the near-total elimination of [[Definition:Basis risk | basis risk]] for the cedant. Because recoveries are calibrated to actual losses, there is no gap between what the cedant pays out and what it receives from the reinsurer — a critical consideration for [[Definition:Solvency | solvency]] management and [[Definition:Regulatory capital | regulatory capital]] calculations. Regulators and [[Definition:Rating agency | rating agencies]] generally grant full credit for indemnity-based reinsurance when assessing an insurer's balance sheet, whereas [[Definition:Parametric insurance | parametric]] or [[Definition:Industry loss warranty (ILW) | industry loss warranty]] structures may receive partial or no credit due to residual basis risk. The trade-off is operational complexity: the cedant must maintain robust [[Definition:Data reporting | loss reporting]] infrastructure, and settlement timelines can stretch when large or complex [[Definition:Catastrophe loss | catastrophe events]] require extended adjustment periods.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Parametric trigger]]
* [[Definition:Excess of loss reinsurance]]
* [[Definition:Quota share reinsurance]]
* [[Definition:Basis risk]]
* [[Definition:Follow the fortunes]]
* [[Definition:Industry loss warranty (ILW)]]
{{Div col end}}

Definition:Indemnity-based reinsurance - Revision history

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