Introduction
Imagine entering a world where insurance agencies, the titans of risk, decide they need some protection themselves. It’s like if Superman found he could use a little help from Wonder Woman every now and then. This safety net in the world of insurance titans is known as reinsurance. Confused? We’re just getting started!
Reinsurance: The Partner Shield
Dramatic re-enactment of an insurer getting some backup
What Is Reinsurance? 🤔
Simply put, reinsurance is an agreement where an insurer buys insurance from another insurer to cover all or part of the risk they are assuming in their own policy portfolios. Think of it as your insurance policy’s insurance policy. It’s the insurance version of “You scratch my back, I’ll scratch yours.”
Why Reinsurance? The Bigger the Better!
Insurers, like the rest of us, can occasionally bite off more than they can chew. Reinsurance allows them to share the burden of risk among themselves so nobody ends up with an upset tummy – financially speaking, of course. Here’s why reinsurance happens:
- Risk Spreading: Insurers pass some of their risks to other insurers to manage their risk exposure.
- Solvency Control: By spreading risk, insurers ensure they won’t collapse under massive amounts of claims.
- Underwriting Capacity: They can underwrite more and larger policies if they offload some of the risks.
The Characters in This Drama: Cedents & Reinsurers 🎭
- Cedent: The insurance company seeking reinsurance—they’re like your local superhero asking for backup.
- Reinsurer: The insurance company providing the reinsurance—think of them as the sidekicks stepping in to help our hero save the day by sharing the load.
Types of Reinsurance Deals 🧾
There are two main types of reinsurance which have nothing to do with the way we enjoy our waffles:
- Proportional Reinsurance: Often called quota share or surplus share reinsurance. It means the reinsurer gets a share of the premiums and, in return, covers a proportionate share of the losses.
- Non-proportional Reinsurance: Here, the reinsurer only kicks in when losses exceed a specified amount, a.k.a. Excess of Loss reinsurance. It’s like a deductible but on an insurance company scale.
How Reinsurance Works – The Formula! 🧮
If you’ll permit me—a drama-that’s-better-left-mathy—to break things down, here’s a simple formula:
graph LR
A[Primary Insurer] --> B[Reinsurer]
A ---> C[Customer]
C --> A{Pays Premiums}
B --> A{Reinsurer Covers Claims}
Happy Days for Everyone! 😀
With reinsurance, the primary insurer can breathe easier, and the reinsurer thinks,
