What exactly is reinsurance?

Published on : 04 June 20223 min reading time
Being a guarantee for insurers, reinsurance is as basic as insurance! It simply consists of the reinsurer undertaking to reimburse the customer for a share of the premiums paid when the risks are incurred. In other words, the insurer transfers parts of their risk portfolios to other players by an agreement in order to lower the odds of paying a large debt resulting from a claim.

Reinsurance in a nutshell

Reinsurance is an operation that allows insurance companies to protect themselves and retrocede to the reinsurer the risks that they have covered. Also known as secondary insurance, it acts as a protection for insurance companies. In the event of a claim and according to the contract concluded with the client, this guarantee repays the insurance company. The latter, also known as the ceding company, leaves it to the reinsurance company to cover damages that are difficult to address alone. These include shipwrecks, earthquakes, major fires and other consequential events. The reinsurer can provide the company with the funds it needs to increase its coverability. In short, reinsurance is insurance for insurers! For more information on the subject, we recommend you check out MS Amlin’s insurance solutions.

How does reinsurance work?

The reinsurance company consists of a group of several specialist insurers. It does not take over all the risks, but only part of them. This financial structure consists of guaranteeing daily support to its clients. In practice, the reinsurance contract is concluded between the ceding company, which accepts the risks submitted by the client, and the reinsurer. With this contract, reinsurance reimburses the insurer for a sum paid to compensate for a loss. In return, the direct insurer gives the reinsurer a discount on the amount originally paid by the insured. This contract is usually taken as a form of reinsurance treaty comprising the portfolio of risks placed in the same market.

What are the benefits of taking out reinsurance?

The main purpose of reinsurance is to allow for the sharing of risks so that the grantor’s financial vulnerability is limited. If an insurer’s underwriting capacity is increased, it allows them to obtain coverage in amounts that are as high as their capacity to commit. In addition, reinsurance can strengthen the cash flow of a ceding company and allow it to fund its activities by paying out deposits and advances on the claim, which in turn allow it to maintain a degree of solvency that meets international standards. Finally, the reinsurer usually has the experience and perfect knowledge of the markets and can thus offer the ceding company the technical assistance that it needs to comprehend and reduce its risk exposure.

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