A primary insurer purchases reinsurance to limit its exposure, usually to a specific type of risk, thereby diversifying its risk portfolio. Companies in this sector focus on assuming all or part of the risk associated with existing insurance policies originally underwritten by direct insurers. In other words, the main activity of this industry is to insure insurance companies. Reinsurance occurs when several insurance companies share the risk by purchasing insurance policies from other insurers.
The global carrier reinsurance industry provides support to direct insurance markets around the world. Essentially, reinsurers provide insurance for policies that industries have written, but insurance is unwilling or unable to accept. A primary insurer purchases reinsurance to limit its exposure, usually to a specific type of risk, thereby diversifying its risk portfolio. The global reinsurance market then spreads these risks across more companies and countries, maximizing risk spread and protection against unexpected losses. This improves the capital efficiency of the entire insurance market, so less capital is needed to secure a unit of risk.
- The oldest known reinsurance contracts or “treaties” date back to the 14th century
- A primary insurer buys reinsurance to limit its exposure, usually to a specific type of risk
- Reinsurance companies, or reinsurers, are companies that provide insurance to insurance companies
- Reinsurers play a major role for insurance companies as they enable them to help transfer risk, reduce capital requirements and reduce claimant compensation.
- Reinsurers generate revenue by identifying and accepting policies they deem less risky and reinvesting the insurance premiums they receive
- Reinsurance improves the capital efficiency of the entire insurance market, so less capital is needed to cover any unit of risk
- Insurance companies pay insurance premiums to reinsurers for the transfer of insurance liabilities
- Reinsurance allows insurance companies to write more policies
- Reinsurers have developed a very high level of expertise in risk-based underwriting
Reinsurance Sector – Investment Profile:
The global reinsurance industry requires a relatively small pool of very high quality human resources. Indeed, the industry bears a higher level of risk than the primary insurance markets, but does not require an extensive sales and service network. Specialized personnel are needed to quantify and understand risks so that premiums are correctly priced and a balanced risk portfolio is achieved. Incorrect pricing and the misuse of retrocession agreements can limit underwriting gains and magnify underwriting losses, harming the reinsurer’s bottom line.
Staff are also needed to resolve reinsurance claims. This requires the investigation and verification of claims, the collection of information and the assessment of claims, the calculation of liability and the payment of claims in a timely manner.