What is reinsurance: what is it for and what types

What is reinsurance: what is it for and what types

It is very common to hear about reinsurance. You may have wondered if this influences you when taking out insurance, or even if insurance is the same as reinsurance. But you don't have to worry. Reinsurance is something that is the responsibility of insurance companies only. In this article, we explain what reinsurance is, what it is for, and how many types of reinsurance there are.

what is reinsurance

In simple words, we could say that reinsurance is insurance that companies make to insure the risk they assume. In other words, reinsurance is an agreement by which an insurer transfers to another insurer the risk it assumes (in whole or in part).

In other words, reinsurance is a way to protect insurers from assuming large losses in the event of catastrophic events or when they have a large number of claims that must be compensated. Therefore, reinsurance is a contract between an insurer and another reinsurance company, in which the second company agrees to assume a part of the risk in exchange for a premium.

The reinsurance mechanism is a way of giving solidity to the operation of the insurance sector, and also a way of giving peace of mind to the insured, who thus have an additional guarantee. And it is that, by ceding part of the risk, insurers minimize the possible losses that could cause the company to go bankrupt.

In other words, with reinsurance, the insured values ​​are homogenized and the responsibilities assumed are limited. This allows control of the loss frequency (probability of occurrence), the intensity of the loss (scope), and its amount (amount). This favors a greater capacity and offer of insurance to assume risks.

What is reinsurance for?

Reinsurance serves to protect insurers from assuming large losses in the event of catastrophic events or when they have a large number of claims that must be compensated. It is a way to share the risk with other companies and reduce the financial impact of losses. Reinsurance is a factor that reduces the risk for the reinsured, preventing it from incurring large losses or even bankruptcy.

In addition, reinsurance allows the financing of insurers, since the diversification of risks allows them to increase the volume of billing by being able to contract more insurance policies. Reinsurance is also useful for policyholders since it allows them to have more comprehensive coverage and better protect themselves against possible risks. By having reinsurance, insurers can offer broader coverage and reduce the risk of not being able to meet their obligations in the event of suffering large losses. Types Of Reinsurance And Why The Insurers Need It?

What does reinsurance cover?

Reinsurance covers a wide variety of risks, from catastrophic events like earthquakes and hurricanes to more common risks like car accidents and illnesses. Some of the most common risks covered by reinsurance are:

• Natural Perils: Reinsurance can cover risks such as earthquakes, hurricanes, floods, and other natural disasters. This is especially important for insurers who operate in areas exposed to these risks.
• Commercial risks: Reinsurance can also cover commercial risks, such as fires and explosions in buildings or factories, thefts and financial losses. This is especially interesting for companies that depend on their infrastructure or their inventory to operate.
• Personal risks: reinsurance can also cover personal risks, such as car accidents, illnesses, and financial losses. This is especially important for people who depend on their health or their job to maintain their financial well-being.
• Liability risks: Reinsurance can also cover liability risks, such as claims for damages or injuries caused to third parties. This is especially important for businesses and individuals who may be subject to lawsuits for damages caused to other people.
• Maritime risks: Reinsurance can also cover maritime risks, such as losses in shipping or damage to ships or cargo. This is especially relevant for companies that rely on shipping for their business activities.

types of reinsurance

There are different types of reinsurance, including:

1. Proportional reinsurance: the insurer and the reinsurance company share the risk proportionally.
2. Non-proportional or Excess-Loss Reinsurance: The reinsurance company is only liable for losses that exceed a certain threshold, known as a deduction.
3. Equity reinsurance: the reinsurance company acquires a stake in the capital of the insurer in exchange for assuming a part of the risk.
4. Retrocession reinsurance: the reinsurance company is responsible for part of the risk assumed by another reinsurance company.

We look at each of them in more detail below.

proportional reinsurance

In proportional reinsurance, the reinsured and the reinsurer agree on what percentage of the premium and of the risks of the policy contract each of them will assume. This means that both parties assume a part of the risk in proportion to the insured amount.

In this type of reinsurance, the insurer and the reinsurance company establish a participation rate, which indicates the percentage of risk assumed by each of them. For example, if the participation rate is 50%, it means that the insurer and the reinsurance company assume the same amount of risk.

Proportional reinsurance can be of several types:

• Surplus contract: the reinsurer undertakes to assume a certain percentage of claims if a fixed amount is exceeded.
• Separate quota contract: the percentage of the risks that the reinsured will take is established; this will define the corresponding part of the premium.
• Mandatory optional contract: the reinsurer is obliged to accept the risks that the reinsured decides to cede (this makes it difficult to find a reinsurance company that decides to accept these risks).
• Non-proportional reinsurance: the reinsurer assumes a portion of the costs of claims that exceeds an agreed value, so the reinsurer will only respond to claims that exceed that value. It is a guarantee in claims that exceed the amount of money that would have been set.

Proportional reinsurance is a beneficial option for insurers as it allows them to share risk fairly and reduce the financial impact of losses. In addition, by sharing the risk with other companies, insurers can offer more extensive and affordable coverage to their customers.

non-proportional reinsurance

Non-proportional or excess-loss reinsurance is a form of risk sharing in which the reinsurance company is only responsible for losses that exceed a certain threshold, known as a deduction. This means that the reinsurance company only bears the risk for losses above that threshold, while the insurer bears the risk for losses below that threshold.

Reinsurance  does not provide it has several modalities:

• Contract for excess claims.  The reinsurer assumes the claim when the accumulated claim rate for the year by the reinsured exceeds a certain amount or a percentage of the premiums.
• Risk excess loss contract . When the fixed amount is exceeded, the reinsurer assumes a claim occurred in a particular risk: that is, the limit of that amount will be per risk.
• Event excess loss contract . It occurs when there are accumulations of risks and claims with the same company.

Non-proportional reinsurance is a beneficial option for insurers, as it allows them to share risk more efficiently and reduce the financial impact of losses. Also, by taking a deduction, the reinsurance company can better assess the risk and determine what losses it is willing to take.

capital reinsurance

Equity reinsurance is a form of risk sharing in which the reinsurance company acquires an equity interest in the insurer in exchange for assuming part of the risk. This means that the reinsurance company becomes a shareholder of the insurer and acquires rights as such, such as the right to participate in the company's decisions and receive part of the profits.

In capital reinsurance, the reinsurance company not only assumes part of the risk, but also acquires a stake in the capital of the insurer. This can be mutually beneficial as the insurer can obtain additional financing and the reinsurance company can earn a return on its investment through the insurer's profits.

Capital reinsurance is an interesting option for insurers looking for additional financing and for reinsurance companies that want to diversify their investment portfolio. However, it is important to note that by acquiring an equity interest in the insurer, the reinsurance company also assumes the investment risk and may lose some or all of its investment if the insurer does not make a profit.

retrocession reinsurance

Retrocession reinsurance is a form of risk sharing in which the reinsurance company takes responsibility for a part of the risk assumed by another reinsurance company. This means that the reinsurance company acts as a kind of “insurer of the insurer”, assuming a part of the risk that has been transferred by another reinsurance company.

Retrocession reinsurance is a beneficial option for reinsurance companies that want to diversify their risk portfolio and reduce their exposure to certain types of risks. By assuming a part of the risk of another reinsurance company, the reinsurance company can reduce its own risk and improve its financial solvency.

However, it is important to note that by assuming part of the risk of another reinsurance company, the reinsurance company also assumes the risk of not being able to meet its obligations in the event of large losses. Therefore, it is important to carefully assess the risk and financial solvency of the reinsurance company with which the retrocession is being made.

How is insurance different from reinsurance?

Although insurance and reinsurance are two ways to protect yourself against the risk of financial loss due to unforeseen events, there are actually some key differences between the two. They are the following:

• Purpose: Insurance is intended to protect insured persons or companies from financial loss due to unforeseen events, while reinsurance is intended to protect insurers from financial loss due to unforeseen events.
• Contract: insurance is based on a contract between the insurer and the insured, which establishes the conditions of coverage and the amount of the premium to be paid. Reinsurance, on the other hand, is based on a contract between the insurer and the reinsurance company, which establishes the coverage conditions and the reinsurance amount to be paid.
• Risk: insurance covers individual risks, such as car accidents or illnesses, while reinsurance covers collective risks, such as catastrophic events or large claims.
• Participation: In insurance, the insurer assumes the risk and the insured pays the premium. In reinsurance, the insurer and the reinsurance company share the risk proportionally or based on a loss threshold.

That is, insurance protects insured individuals or companies from financial losses due to unforeseen events, while reinsurance protects insurers from financial losses due to unforeseen events. Insurance covers individual risks and reinsurance covers collective risks. Furthermore, in insurance, the insurer bears the risk and the insured pays the premium, whereas in reinsurance, the insurer and the reinsurance company share the risk proportionally or based on a loss threshold.

What are the advantages of reinsurance?

Reinsurance has several advantages for both insurers and policyholders:

risk reduction

One of the main advantages of reinsurance is that it allows insurers to reduce the risk of suffering large losses or even bankruptcy. By sharing the risk with other companies, insurers can better protect themselves against possible losses and offer more comprehensive and affordable coverage to their customers.

financing

Reinsurance also provides financing to insurers, as it allows them to take out more insurance policies by diversifying risk. This increases billing volume and can improve the financial solvency of the insurer.

Greater solvency

Reinsurance also helps improve the solvency of insurers by allowing them to share risk and reduce their exposure to certain risks. This can improve customer and investor confidence in the insurer and increase its market value.

Greater protection

Reinsurance also offers greater protection to policyholders by allowing insurers to offer broader and more affordable coverage. This can help policyholders to be more comfortable with the possibility of financial loss due to unforeseen events.

At PuntoSeguro.com we help you with your policies

PuntoSeguro is a digital insurance brokerage. We are insurance brokers. In other words, it is the insurers that pay us for contracting the policies. As mediators, we can help you find the company and the policy that best suits your needs. And if you have a problem with your insurance during your contractual relationship with the insurer, we help you manage it. All this at no additional cost to you.

Therefore, if you contract any insurance through PuntoSeguro, you will only have to worry about the price of the policy. And if you need to cancel the insurance, we help you in the process.

If you need more information to take out insurance or need any additional clarification, do not hesitate to contact us.

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