It is not only individuals who require insurance for the unexpected events in life. Even insurance companies need someone to have their back when things happen unexpectedly. These are reinsurance companies. There are some claims that can dry the taps on an insurer so they ran to the mother of all insurances, the reinsurance company.
What is Reinsurance?
Most of the time, companies will either self-insure or purchase a policy from another company to provide financial protection if the headquarters is destroyed by fire or a natural disaster, or if the business suffers from a break-in or vandalism.
When it comes to protecting themselves from losses due to legitimately filed claims, insurance companies purchase policies on what is known as the reinsurance market. Reinsurers can be specialist reinsurance companies that only undertake reinsurance business, while other times they are traditional insurance companies. Because insurance companies have outstanding policies that can add up to millions or even billions of dollars worth of risk, they will often take out several reinsurance policies to protect themselves from having too much risk.
Just as there are different types of insurance policies or covers for individuals there are different types of reinsurance for insurance companies. Each has its own cover rules so a company chooses what suits its needs best.
1. Facultative Coverage
This type of policy protects an insurance provider only for an individual, or a specified risk, or contract. If there are several risks or contracts that needed to be reinsured, each one must be negotiated separately. The reinsurer has all the right to accept or deny a facultative reinsurance proposal.
2. Reinsurance Treaty
Unlike a facultative policy, a treaty type of coverage is in effect for a specified period of time, rather than on a per risk, or contract basis. For the duration of the contract, the reinsurer agrees to cover all or a portion of the risks that may be incurred by the insurance company being covered.
3. Proportional Reinsurance
Under this type of coverage, the reinsurer will receive a prorated share of the premiums of all the policies sold by the insurance company being covered. Consequently, when claims are made, the reinsurer will also bear a portion of the losses. The proportion of the premiums and losses that will be shared by the reinsurer will be based on an agreed percentage. In a proportional coverage, the reinsurance company will also reimburse the insurance company for all processing, business acquisition and writing costs. Also known as ceding commission, such costs may be paid to the insurance company upfront.
Insurance companies also have to go through a lot before settling on a reinsurance company. They will do their research and find out about the company’s experience and reputation. The main thing is that a reinsurance company must have great financial backing.
To begin with, when choosing a reinsurance company, insurance companies are more like the consumer than you would imagine. They do research into the reinsurer’s reputation to see if it is well-respected and has a history of paying claims fully and quickly. They also want to make sure the reinsurance company is easy to work with and doesn’t have a history of flying off the deep end when disputes arise. Additionally, insurance companies care about cost just like we do. They want to make sure the premiums they are paying are not more than they can handle. Also, they make sure that they have money on hand to pay for things that are not covered if it comes to that.
On the flip side, insurance companies will also consider different things when shopping for a reinsurance company. Since the reinsurance company is being used to back them up on bigger claims that spill over, they want to make sure the reinsurance company is financially stable and can take a big financial hit without going bankrupt. It is their company’s backbone and if it can’t support them, everything could crumble.