Reinsurance

An insurance company that wants to expand its business without raising more capital reinsures more of its business than it would otherwise have done. In this way, the premium of its own account decreases as a percentage of the total premium written.

 

In so doing, the insurance company can maintain the solvency margin and at the same time increase its market share of new business. If even more reinsurance is bought for the same volume of business written, the insurance company can even maintain the solvency margin with less capital. In both cases the insurance company is effectively using its reinsurer's capital to increase its underwriting capacity.

"Reinsurance has been compared to the shock absorbers on a car. They do not make the road smoother but passengers feel the bumps less because these are absorbed by the device fitted to the car. Similarly, reinsurance does not reduce losses but merely evens out the effect on the insurer. Thus, to ensure that the shock absorbers do not become worn out with the possibility of causing the car to cease function, the road must be repaired. So it is with reinsurance in that the underlying problem of inadequate rates must be addressed in order to secure the successful operation of the insurer."

 

Reinsurance plays a very important part in this process. As professional insurance intermediaries and consultants, reinsurance brokers help their clients such as insurance companies, reinsurance companies or insurance brokers, in solving their reinsurance needs for support capacity and protection of their balance sheet. Reinsurance brokers make it their business to establish good relationships with reinsurers who can participate in the "insurance back up service."

The most common reasons for purchasing reinsurance include:

 

1) Capacity Relief - Allows the reinsured to write larger amounts of insurance.

 

2) Catastrophe Protection - Protects the reinsured against a large single, catastrophic loss or multiple large losses

 

3) Stabilization - Helps smooth the reinsured's overall operating results from year to year.

 

4) Surplus Relief - Eases the strain on the reinsured's surplus during rapid premium growth.

 

5) Market Withdrawal - Provides a means for the reinsured to withdraw from a line of business, geographic area or production source.

 

6) Market Entrance - Helps the reinsured spread the risk on new lines of business until premium volume reaches a certain point of maturity; can add confidence when in unfamiliar coverage areas.

 

7) Expertise/Experience - Provides the reinsured with a source of underwriting information when developing a new product and/or entering a new line of insurance or a new market.