Reinsurance occurs when different insurance organizations pool risk by purchasing insurance policies from multiple insurers to limit their own potential loss in an event of disaster or catastrophe. Dubbed by Reinsurance Association of America as “insuring of insurers”, its objective is that no single insurance organization has an excessive exposure in case something big and catastrophic should arise.
The Beginnings of Reinsurance
Reinsurance Association of America notes that its roots can be traced to the fourteenth century when marine and fire insurance was utilized as the original form of reinsurance. Since then, reinsurance has expanded into almost every facet of modern insurance market: companies representing major sales volumes within the U.S.; offices within major insurance organizations within the US; reinsurers not authorized within US; surrendering directly from reinsurer or through representative/reinsurance intermediary.
How Reinsurance Works
If a single organization were to accept all the risk on its own, the associated expenses could bankrupt or monetarily ruin an insurance organization and potentially fail to cover losses suffered by those paying premiums for protection.
Imagine an enormous storm ripping across Florida and causing billions in damages. If a single insurer sold all mortgage holders insurance, their ability to cover such misfortune would likely be severely limited; therefore, retail insurance firms resell portions of coverage (reinsurance), spreading risk between multiple carriers.
Reinsurance Association of America notes that its roots can be traced to the fourteenth century when marine and fire insurance was utilized as the original form of reinsurance. Since then, reinsurance has expanded into almost every facet of modern insurance market: companies representing major sales volumes within the U.S.; offices within major insurance organizations within the US; reinsurers not authorized within US; surrendering directly from reinsurer or through representative/reinsurance intermediary.
Reinsurance policies can benefit an organization for four reasons: to limit their exposure on particular risks, mitigate against loss experiences, protect themselves and others against disasters and increase their abilities. Reinsurance can assist an organization by offering the following advantages:
1) Risk Transfer: Companies may share or transfer risks between organizations.
2) Arbitrage: Additional profits can be realized by purchasing insurance at different costs than what the organization collects from policyholders.
3) Capital Management: Companies can reduce losses by shifting risk; doing so makes room for extra capital to be deployed elsewhere.
4) Solvency Margins: Organizations can purchase surplus alleviation insurance to allow them to attract new clients while avoiding raising additional capital.
5) Expertise: A knowledgeable guarantor can be invaluable when it comes to helping an organization secure higher ratings and premiums.