What is reinsurance
Reinsurance is a slightly odd thing because, it has been in existence since at least 1365, it is used almost certainly by every Insurer world-wide yet overall virtually no one has ever heard of it. Unless you are involved in it.
After the Financial Disasters around 2008/9 – people looked quite horrified if I said I was involved in Reinsurance. Assumption, “never heard of it, sounds odd must be a Money Market Tool!!
Many people who are involved in it, fall into it by “mistake” not through choice – see how I got involved!
Reinsurance is insurance of insurers. As an example – Major UK flood! (one event)
UK Insurer A – has £250m pounds of claims from this flood. Wants smooth results and to protect its financial strength
At the start of the year the Insurer has bought reinsurance with reinsurers for £500m of Cover in excess of a deductible (excess) of £200m – thus can claim £50m from its reinsurers (£250m – £200m)
There are many variations of reinsurance – this example would be called Catastrophe Excess of Loss (or Cat X/L).
Core words Proportional/ProRata
Sharing Premiums, Losses and Expenses with reinsurers
Excess of Loss / X/L / XOL…
Buying a pre-agreed amount of Cover in excess of a pre-agreed Deductible, as in the example above.
*Facultative Reinsurance / Fac
Insurer (reinsured) does not have to reinsure this specific risk.
Can decide whether to reinsure or not.
Can decide who to offer it to.
Reinsurer chosen, can accept, decline or offer alternative terms.
*Origin – Facultativo = Latin for Optional
Treaty A deal under which a reinsured agrees that certain class(es)…… of business will automatically be reinsured, within pre-agreed rules and that the reinsurer will automatically give coverage.