Reinsurance- Insurance for Insurance Companies

Have you ever had any questions relating to Reinsurance?  Andy Cassidy, Owner and Vice President here at EC&S is here to help with the below information:

Reinsurance is based on the same principle as insurance—the sharing of risk. Just as businesses and individuals buy insurance to limit their risk exposure, insurance companies reinsure a portion of their own risks. An underwriter with reinsurance does not have to pay all the costs of a large or catastrophic loss. The underwriter shares premiums and losses with others. In short, reinsurance is insurance for insurance companies.

Reinsurance is typically used by primary insurers to cover unforeseen or extraordinary losses. This is especially true of natural and manmade catastrophes and so-called “long-tail” risks like pollution liability, where losses may not be evident until years after the event resulted in the pollution. Primary insurers also use reinsurance to limit liability on certain risks, increase their capacity to write business and assist in stabilizing their businesses by leveling wide variances in profit and loss margins.

An underwriter’s ability to spread risk affects insurance capacity. When reinsurance capacity is limited, the overall capacity in the insurance marketplace declines. This is especially true of capacity in the commercial property/casualty lines of insurance because insurers reinsure a significant portion of this business.

There are two kinds of reinsurance: facultative and treaty. Facultative reinsurance covers a single policy or risk. For instance, an insurer may be willing to assume only part of a specific risk and will look for a reinsurer to accept the balance of the risk in exchange for part of the premium. The reinsurer may set the terms and conditions under which it will agree to the reinsurance transaction.

Under treaty reinsurance, an insurer and a reinsurer sign a contract under which the reinsurer agrees to accept a predetermined amount of losses generated by a class or “book” of business written by the insurer. The predetermined amount that the reinsurer will cover can be a percentage of the losses, a specified dollar amount or a combination of the two. The reinsurer accepts the terms and conditions placed on the underlying insurance policies and will generally pay after insurer losses reach the deductible amount.

Ultimately, the responsibility for paying a claim —particularly a large one—may be shared by the global insurance industry. It is important to recognize that reinsurance is a business transaction between an insurance company and its reinsurers, two parties both highly knowledgeable about the subject at hand. An insurer pays valid claims for losses covered by policies it underwrites. In turn, the insurer files a claim with its reinsurers for reimbursement of the share of the risk they hold.

Still have questions?  Give us a call at 301-948-5800. 

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