What is reinsurance?

By Steven Merkel AAA
A:

Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit the total loss the original insurer would experience in case of disaster. By spreading risk, an individual insurance company can take on clients whose coverage would be too great of a burden for the single insurance company to handle alone. When reinsurance occurs, the premium paid by the insured is typically shared by all of the insurance companies involved.

Reinsurance can help a company by providing:

  1. Risk Transfer - Companies can share or transfer of specific risks with other companies
  2. Arbitrage - Additional profits can be garnered by purchasing insurance elsewhere for less than the premium the company collects from policyholders.
  3. Capital Management - Companies can avoid having to absorb large losses by passing risk; this frees up additional capital.
  4. Solvency Margins - The purchase of surplus relief insurance allows companies to accept new clients and avoid the need to raise additional capital.
  5. Expertise - The expertise of another insurer can help a company obtain a proper rating and premium.

(For more on this topic, read When Things Go Awry, Insurers Get Reinsured.)

This question was answered by Steven Merkel.

RELATED FAQS

  1. What are some examples of common fringe benefits?

    Learn how offering fringe benefits can be a strategic recruitment and retention tool for employers and drastically increase ...
  2. What's the average salary of an actuary?

    Get insight into the intriguing career of risk analysis and forecasting. How much do actuaries make, and how is this field ...
  3. What is an equity-indexed annuity?

    Understand what an equity-indexed annuity is, its advantages and disadvantages, and how it differs from other annuity investments.
  4. Who are the best-rated life insurance companies in the US?

    Learn about what makes an insurance company the best. Read about the best life insurance companies in the U.S. in 2014, following ...
RELATED TERMS
  1. Basket Deductible

    A single deductible that is designed to pay for losses from different ...
  2. Associate In Fidelity And Surety Bonding (AFSB)

    A designation earned by bond producers, bond underwriters, and ...
  3. Bare Walls Coverage

    A type of insurance coverage that applies to communally used ...
  4. Contents Rate

    The premium required to insure the contents of a property rather ...
  5. Corporate Reimbursement Coverage

    A feature of liability insurance that covers the insured company ...
  6. Coverage Trigger

    An event that must occur in order for a liability policy to apply ...

You May Also Like

Related Articles
  1. Insurance

    Finding The Best Health Insurance You ...

  2. Insurance

    Avoid The No-Health-Insurance Penalty ...

  3. Insurance

    Rating Assurant Prepaid Vs. Delta PPO ...

  4. Insurance

    Who (Besides Retirees) Can Get Medicare?

  5. Insurance

    Should You Borrow From Your Life Insurance?

Trading Center