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What Is Reinsurance? (And Does My Business Need It?)


What Is Reinsurance? (And Does My Business Need It?)

As you are browsing your insurance company’s website, you might notice “reinsurance” listed among the services offered. What is reinsurance and is it something that your business should think about purchasing? Read on to learn more about this particular type of coverage.

The simple answer for most companies is that no reinsurance coverage is necessary. That’s because reinsurance is not a type of insurance that is relevant to all businesses. Instead, reinsurance is meant specifically for firms that offer and sell insurance coverage.

How Reinsurance Works

This distinction can be confusing if you have never heard of reinsurance before. When we think of an insurance company, we tend to think exclusively of the services it provides for us (e.g. selling insurance). We think less about the steps that an insurance company might take to protect itself from risk (such as purchase its own insurance coverage).

Reinsurance is a type of insurance coverage that is designed specifically to protect insurance companies from risk. If an insurance company seeks reinsurance from a second insurance company, it is essentially handing off some of its client policies to another insurer. The company offering the reinsurance service underwrites the policy and helps cover the payments for any claims made on that policy. The reinsurer, in other words, is taking on some of the risk associated with the policy. In return, the reinsurer receives some of the premiums that the original insurance company has received on the policies in question.

In this type of insurance agreement, the first insurance firm is ceding some of its risk to a second insurance company, and is therefore known as “the ceding party.” The insurer that accepts some of the liability of the ceding party’s policies, as we have already established, is known as “the reinsurer.” The ceding party hands off some of its policies to lower the likelihood of having to make a sizable payout to a customer. The reinsurer, meanwhile, accepts the ceded policies to make its profits.

Understanding the Benefits of Reinsurance

On the surface, the advantages of reinsurance coverage are clear on both sides. As discussed above, the ceding party protects itself from risk by ceding some of its liability and risk to a third party. The reinsurer, meanwhile, can feasibly run a profitable business just by offering reinsurance.

The benefits of reinsurance become harder to understand when you consider that taking on risk is always an insurance company’s job anyway. While reinsurance can be beneficial simply as a way for an insurance company to “hedge its bets,” it tends to come into play more often in situations where major disasters or events might lead to a lot of substantial insurance claims in a short period.

Consider this scenario: say an insurance company provides housing insurance policies for many clients along the Atlantic coast. Around hurricane season, the chances of that insurance provider receiving policy claims from its customers go up substantially. After a particularly severe storm, the insurer might get a lot of large insurance claims from many of its customers, simply because those clients were all hit and affected by the same disastrous event.

In this kind of situation, the insurance company could potentially be in trouble. The firm would have to honor its client policies and pay out large sums of money to cover all the claims. With so many large payments to cover in such a short period, the insurer could be at risk for becoming financially insolvent.

The insurer would be much better off if it spread out the risks and potential costs of home insurance policies in areas that typically see hefty hurricane coverage. In other words, if the insurer had decided to work with a reinsurance provider, covering policy claims after a major hurricane disaster would not be as much of a burden. As such, insurers will often seek reinsurance to protect themselves from scenarios such as this one.

Reliance Insurance Group and Our Role in Reinsurance

At Reliance Insurance Group, we do not provide reinsurance coverage. What we do is called reinsurance assisted placement. Instead, we work as a kind of broker between insurers and the reinsurance market. If an insurance company comes to us in need of reinsurance placement, we will sit down with them to discuss and determine their specific reinsurance needs.

With this information in hand, we will then search the reinsurance marketplace to find a company that can offer the type of reinsurance policy our client needs. In essence, if your firm requires reinsurance placement services, we will do the heavy lifting to find the policy you need. We will research companies that offer reinsurance, collect quotes, and negotiate on your behalf, all to make sure that you can manage your risk via a fair and mutually beneficial reinsurance agreement.

To learn more about our reinsurance placement services at Reliance Insurance Group, give us a call at 732-602-0010.

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