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's the difference between renter's insurance and homeowner's insurance?

    Renters insurance and homeowners insurance offer similar benefits for occupants and homeowners, but in different ways and ...
  2. What's the difference between Social Security Disability Insurance (SSDI) and Supplemental ...

    Both Social Security Disability Insurance and Supplemental Security Income are administered by the Social Security Administration, ...
  3. On average, what can I expect my private mortgage insurance (PMI) rate to be?

    Learn the several factors that come into play when insurance companies determine the private mortgage insurance rate for ...
  4. Why do I need to pay private mortgage insurance (PMI)?

    The extra interest payments caused by private mortgage insurance may seem excessive, but there's a good reason lenders need ...
RELATED TERMS
  1. Policyholder Surplus

    The assets of a mutual insurance company minus its liabilities. ...
  2. Insurance Coverage Area

    The geographic region in which an insurance policy’s benefits ...
  3. Commercial Insurance Lines

    Commercial insurance lines help keep the economy running smoothly ...
  4. Employer's Liability Insurance

    A product for employers that protects them from major financial ...
  5. Ceded Reinsurance Leverage

    The ratio of ceded insurance balances to policyholders’ surplus. ...
  6. Class 3-6 Bonds

    Several classes of noninvestment grade bonds held by an insurance ...
comments powered by Disqus
Related Articles
  1. How the Affordable Care Act Changed ...
    Insurance

    How the Affordable Care Act Changed ...

  2. 5 Services To Usher In New Clients
    Professionals

    5 Services To Usher In New Clients

  3. Insurance Tips For Homeowners
    Insurance

    Insurance Tips For Homeowners

  4. Why You Don’t Need Mortgage Protection ...
    Insurance

    Why You Don’t Need Mortgage Protection ...

  5. Health Insurance Tips For College Students
    Insurance

    Health Insurance Tips For College Students

Trading Center