Reinsurance Markets & Reinsurers Risk Sharing

Reinsurance is a risk management arrangement by which one insurance company limits its risk utilizing other insurance companies. When organizations, corporations and individuals obtain insurance policies from Insurance Companies to provide protection for various risks - Property & Casualty (P&C) and Health & Life (H&L), Reinsurers provide insurance to the insurance companies to limit their risk. The Insurance Company obtaining reinsurance (referred to as the cover and is called the cedant).

Most reinsurance arrangements are not placed with a single reinsurer. They are shared by a number of reinsurers. This again assists in spreading the risk. Reinsurers financial strength is measured and monitored and reported by rating services including A.M. Best.

Reasons for Reinsuring -There are a number of reasons for insurers to utilize reinsurance. These include:

          1) It allows the insurer to take on greater individual risk than its size might justify and protect against unanticipated losses.
       2) It allows the insurer to offer higher limits to the insured than its own assets would permit.
       3) It allows the insurer to broaden its base of insured clients without raising additional capital needed to provide the coverage. Note: Insurance Companies are limited in the amount of insurance they can write by their financial balance sheet. When they reach their limit, known as the solvency margin, they have several options: stop writing new business; increase their capital; or enter into a reinsurance arrangement. Reinsurance is generally the most effective choice.
       4) The insurance company may want the reinsurers expertise in covering various classes of risk.

Advantages of Reinsurers - The reinsurer may be able to offer lower premiums in covering risk for several reasons:

          1) Reinsurers may operate under less stringent regulations than their insurer clients - they may be required to hold fewer assets to cover the risks.
       2) The reinsurer may have a larger and more diversified portfolio of assets.
       3) Due to the economics of scale, the reinsurer may enjoy efficiencies of scale.
       4) The reinsurers internal asset and liability model may allow for greater risk.

Reinsuring the Reinsurers - Reinsurance Companies also purchase reinsurance from other reinsurance companies.. This is a practice known as retrocession. A reinsurance company that sells reinsurance is a retrocessionaire. A reinsurance company that buys reinsurance is a retrocedent.

Roll of the Reinsurer - Reinsurers play an important roll in the entire business world. Businesses and Organizations often require risk coverage through insurance that one Insurance Company could not individually write. According to the Midwest Research Institute, "The reinsurance industry, by virtue of its support of the primary insurance industry, contributes to the smooth operation of the free enterprise system. This is accomplished by increasing the capacity of the primary carriers and strengthening their financial position."