How exactly this reinsurance works?

by amit » Sat Feb 28, 2009 12:34 pm
Posts: 366
Joined: 25 Jan 2009

i have a specific query regarding all about reinsurance? how does it really work? As we being agent we have only preliminary knowledge about the reinsurance.Any help by actuaries? :D :wink:

Total Comments: 8

Posted: Sun Mar 01, 2009 02:46 pm Post Subject:

As we being agent we have only preliminary knowledge about the reinsurance.

geeze i'd have thought that would be a big part of agent training... :? I've always thought of it as 'insurance for the insurance company' it's a transfer of some of the risk to another carrier...from the business dic.

Definition
Practice where an insurance company (the insurer) transfers a portion of its risks to another (the reinsurer). Legal rights of the policyholders (insureds) are in no way affected by reinsurance, and the insurer remains liable to the insureds for insurance policy benefits and claims

There are different types (i think-) of reinsurance....but for the most part this is what it refers to...

Posted: Sun Mar 01, 2009 05:03 pm Post Subject:

lorry the information provided by you is already known to me.(plz 4give me if i have offended you with this straight forward blow)

Any help by actuaries?



i was more specific about the technical jargon of it.Rather it was my fault i should have elaborated about the specific requirements.

Nonetheless i want to know how all these insurers pay their sum to the re insurer and in what way that premium is decided (sole reason to direct the question to actuaries).

But i am thankful for the term 'insurance for the insurance company'.



:arrow: :arrow:

Posted: Mon Mar 02, 2009 10:24 am Post Subject:

Amit, you can’t at the same time have a specific query and all to know about a subject. You either need to concentrate on the specific query that you have or may ask a general question on the topic.

The premium sharing, however, would depend upon the agreement between the reinsurance and insurance company.

Posted: Thu Mar 05, 2009 06:44 pm Post Subject:

Amit,

I can try to help, but as Groundnut, we need some more information about your question. "How reinsurance works" is a very broad question.

Just to start the conversation, there are different way that reinsurance treaties can be set up, but three of the common are:

Quota share: Let's say a primary insurance company P writes $100,000,000 in coverage on a commercial property. Company P does not want to take this much of a risk, however, because a total loss could make the company insolvent. Then they agree to cede, say, 90% of the risk to a group of reinsurance companies. Company A takes, maybe, 40%, and B takes 30%; and C and D take 10% each. Then Company P (that wrote the original policy) forwards 90% of the premium to these companies, less their commission or management fee.

Stop-Loss or Excess of Loss: This is common for cat coverage. Let's say Company P writes $100,000,000 million per year in property coverage in Florida. They expect to pay out maybe $40,000,000 in claims each year if there are no major hurricanes, and maybe $90,000,000 in a year with multiple hurricanes; and somewhere between $40,000,000 and $90,000,000 in the remaining years. It is possible, however, that in a very bad year they could pay out $100,000 or more. This could put the company in a vulnerable position, so they purchase reinsurance cover. They might structure it so that they pay $5,000,000 per year to the reinsurance company, and the reinsurance company pays all hurricane losses exceeding $50,000,000. (The actual amount of premium is determined by the likelihood of exceeding the threshold, and the probable maximum loss).

Facultative Reinsurance: Comany P writes a variety of risks, but every now and then they have something unusual that they are not prepared to handle. For example, an auto insurance company does not write cars worth more then $75,000, but California law requires them to take a car worth more than that if the owner is a good driver. Then Company P can cede the premium to Reinsurance Company A, and Company A will handle only this one policy. North Carolina has a take-all-comers law for auto insurance liability, but companies can choose to cede the liability portion of policies to the North Carolina Reinsurance Facility if they think the risk is too high for them to keep.

In real-life situations, there may be complex combinations of these. On the World Trade Center, for example, different companies took the lead on a group of floors, and had quote share agreements to share the risk on those floors with other reinsurance companies, and stop-loss treaties to control the maximum. The same companies took the risk on multiple groups of floors in different parts of the building, and multiple quote-share treaties. They thought that this would spread their risk, since the idea of the entire building being lost was unfathomable. It was a very complex arrangement that took some time (and lawsuits) to untangle after 9/11.

I hope this helps as a starting point, but I am not sure if it answers your original question. If you can post more details, I am sure we have enough people on here who can help.

Posted: Fri Mar 06, 2009 12:52 pm Post Subject:

Christy P finally i am very happy with this thread.Surely it is really an elaborated answer.I must thank you for your time and patiently answer.

Now my one more question is suppose company P is writing a cover of $ 10000000 and out of that 20 % risk is shared by company B ,20 % risk by company C ........

Now my question is Whether Company B's risk is also shared by company P in the same proportion.( you manage my risk, I will manage yours)

So if that is the scenario then surely all the companies are going to doom if any one of them basically dooms.(without govt's intervention)

this is really turning a hot topic now!!! :arrow:

Posted: Fri Mar 06, 2009 07:18 pm Post Subject:

Amit,

Let me make sure I understand your question properly. If this is a quota share agreement, and Company P writes a $10,000,000 policy; and A, B, and C each have a 20% share, then that leaaves 40% for Company P. If they have $5,000,000 in losses, then:
P would pay the $5,000,000 first;
A, B, and C EACH would pay P $1,000,000 (20% of the losses);
That would leave P with a NET of $2,000,000 paid ($5,000,000, but $3,000,000 recovered from A, B, and C).

This is the idea of quota share. They share equally.

They could add variations on it, such as Company A has a "corridor" up to a certain level and reinsurance kicks in after that. These variations are often done to make sure that A has enough incentive to keep the losses under control, and they are not tempted to say, "Oh, just pay the claim. We have reinsurance!"

You might be correct in saying that all the companies are going to doom if any one of them does, but the plan is that the opposite happens. If one company has bad luck, that bad luck gets spread around so that each company bears a small portion of it. Without reinsurance, that bad luck could bankrupt a company.

Proper use of reinsurance makes it far less likely that companies will go bankrupt. The primary company is safer because they have shared the risk. Each reinsurer takes only a portion of this policy, and a portion of some other policies, so they spread their risk around. If the reinsurance underwriters are doing their job well, then they will take only a portion of Florida windstorm risk, and a portion of California wildfire or earthquake risk, and some midwestern auto risk, and some Kansas terrorist risk, and some New York commerical property, and create a balanced portolio. That way if it is a bad year for hurricanes but not for terrorists in Kansas, then their profits in Kansas make up for their losses in Florida.

Posted: Sun Mar 08, 2009 04:46 pm Post Subject:

If the reinsurance underwriters are doing their job well, then they will take only a portion of Florida windstorm risk, and a portion of California wildfire or earthquake risk, and some midwestern auto risk, and some Kansas terrorist risk, and some New York commerical property, and create a balanced portolio.



i am really impressed with this answer as different underwriters from different companies share the risk with their quota.

I am sure there has to be an apex body which governs all the insurance companies when it comes to the risk ratios involved.

Can you tell me christy p exactly who looks for these issues.I mean who co-ordinates it on large scale.It's really interesting to know about this.

thanks once more. :arrow:

Posted: Sat Mar 06, 2010 05:12 pm Post Subject: how Reinsurance works ?

Hi,
Can somebody quickly educates me on how reinsurance works and the different kinds of it we have.

Thanks.

Raji Isiaka
Niger Insurance Plc
Enugu.

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