Reinsurance

What is reinsurance?

Insurers manage the risks they take on through the process of reinsurance.

When you look at the risks that insurers take on, it is not surprising that they themselves might want to have insurance. When insurers insure a risk again, it is called reinsurance. A third of all business carried out at Lloyd’s is reinsurance.

Reinsurance is an extension of the concept of insurance, in that it passes on part of the risk for which the original insurer is liable. Reinsurance contracts are slightly more specialist than insurance contracts but for most part they work in exactly the same way – it is just that the ‘insured’ is another insurer, known as the ‘reinsured’ .

A contract of reinsurance is between the insurer and reinsurer only and legally there is no direct link between the original insured and any reinsurer. The original insurer is still the one who must pay any claim from the insured – the insurer must then make its own separate claim against the reinsurer.

Reinsurance is important for a number of reasons, including:

To protect against large claims. For example, in the case of a fire in a large oil refinery or a large city hit by an earthquake, insurers will spread the risk by reinsuring part of what they have agreed to insure with other reinsurers so that the loss is not so severe for any one insurer.

To avoid undue fluctuations in underwriting results. Insurers want to ensure a balanced set of results each year without ‘peaks and troughs’. They can therefore get reinsurance which will cover them against any unusually large losses. This keeps a cap on the claims the insurer is exposed to having to pay itself.

To obtain an international spread of risk. This is important when a country is vulnerable to natural disasters and an insurer is heavily committed in that country. Insurance may be reinsured to spread the risk outside the country.

To increase the capacity of the direct insurer. Sometimes insurers want to insure a risk but are not able to do so on their own. By using reinsurance, the insurer is able to accept the risk by insuring the whole risk and then reinsuring the part it cannot keep for itself to other reinsurers.

Like the direct insurance market, reinsurance usually involves specialist brokers who have expert knowledge of the market and access to reinsurance underwriters on behalf of their clients.

Source : http://www.lloyds.com