Reinsurance Is Nothing But the “Insurance for the Insurers”

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Written By Berry Mathew

Reinsurance is very vital to the insurance industry. Globalization and the internet revolution have made reinsurance transactions much easier and helped the reinsurers in mapping their risks in order to avoid accumulations. Almost all of the insurance markets in the world are regulated. This has resulted in increasing compliances with the regulators and their requirements.

Placement of the reinsurance program 

After identifying and analyzing the reinsurance requirements and selection of reinsurance program the next step is the placement of the reinsurance program. The insurance company has to decide in which market it is better to place the risk and whether it should be either direct or through a broker. In some markets, a broker has to be involved for placement whereas in some markets direct placement can be done. A vast majority of reinsurers are from countries that have strong regulatory control and these companies are financially very sound and with a very high credit rating. Hence placing the business directly with these companies is not only secure but also prestigious.

It again depends upon the insurance company which is placing the business if the insurance company is reputed like GEICO, Allstate, GoodtoGo Insurance, then it will not be difficult for it to find a good reinsurer. But if the insurance company is a new company, then it will be easier for it to approach a broker to get the right coverage. Brokers by virtue of their experience, market knowledge, and relationship with the reinsurers will be able to place the business in the international market. They will also be in a position to administer the business to the satisfaction of both the insurers and the reinsurer.

The insurance company is interested to protect it selves from the catastrophic losses and accumulated losses in the motor portfolio. Usually, a combination of self-insurance and non-proportional insurance will help in protecting the portfolio. Some companies also use the proportional form of reinsurance to protect their portfolio. High-value cars are usually fully reinsured under treaty or facultative reinsurance.

Identify and analyze the basics for reinsurance  

Before getting into any reinsurance arrangement, it is better that both parties to the reinsurance agreement have an adequate understanding of the arrangement of the risk transfer.

The insurer should understand the exact form of reinsurance required and other parameters like retention, coverage, and the limits of reinsurance required.

The insurance company should be able to analyze and identify the exposures to its portfolios by the size and type of risks. The exposure can be due to acute cases, major unforeseen accumulations, and high sum insured. Once it identifies the exposures then it can fix its retentions. Retentions are decided based on many factors. The main purpose is to have underwriting stability. The insurance company is the custodian of funds belonging to the insured’s, the insurance company should see to it that the money is adequately protected against loss. Reinsurance is one of the best ways of protecting the portfolio from major loss exposures.

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Selecting the right reinsurance program 

Once the retention levels are decided then the insurance company has to select the right type of reinsurance program and the right reinsurers.

There are various types of reinsurers and reinsurance programs. The insurance companies based upon their financial analysis and technical analysis will be in a position to make a decision as to the suitable type of reinsurance. As far as motor insurance is concerned the treaty is the right type of route and under the treaty, the insurers should be able to decide the suitability of the program.

As the loss ratios under motor insurance normally cross 40% and sometimes it goes beyond 130%, which may be a big cause of concern to the insurers as the volume of business is high so naturally, the losses will also be high.

Hence as far as motor insurance is concerned non-proportional reinsurance will help in protecting the insurance companies from losses beyond a certain limit. In the case of proportional reinsurance, the losses are shared for each and every claim and this will help in reducing the portion of liability of the insurer.

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Reviewing the reinsurance program 

The best reinsurance program also has to be reviewed as we are living in a dynamic environment. Each day changes are occurring, which are in the form of new risks, currency fluctuations, wars, economic recession, bankruptcies, flooding or water damage including insurance for earthquake, Tsunamis, etc., The review should be a continuous process and it should begin well ahead of time of placement or renewal.