What Is Licensed for Reinsurance Only?

Licensed for reinsurance only means a company can provide services specifically related to reinsurance in the state that has granted the license. That means they are strictly limited to operating only within that particular role.

Key Takeaways

  • Licensed for reinsurance only means a company can provide services specifically related to reinsurance in the state that has granted the license.
  • Insurance is predominantly regulated by states, as opposed to the federal government in the United States.
  • Being licensed for reinsurance only allows a firm to benefit from diversification in the insurance market without many of the issues related to selling insurance directly to consumers.
  • On the other hand, ordinary insurers also benefit from the ability to shift outlying risks to companies licensed for reinsurance only.

Understanding Licensed for Reinsurance Only

Licensed for reinsurance only applies to reinsurance brokers who negotiate reinsurance cessions on behalf of a ceding insurer. It also covers the managers of the reinsurance business of a reinsurer.

States may separate the types of reinsurance companies with which an insurer can work. For example, a state may require a company to work with licensed reinsurance intermediary brokers. On the other hand, it may require the insurer to work with licensed reinsurance managers. State regulations prevent an insurer from working with any person or company who is not licensed.

States may require a reinsurance manager to file a bond with the state insurance commissioner for each reinsurer the manager represents. This bond is used to protect the reinsurer. State insurance commissioners may also require the reinsurance manager or reinsurance broker to maintain a policy covering potential financial problems or possible claims associated with errors and omissions.

Requirements of Licensed for Reinsurance Only

Insurance is a highly regulated field, with a vast range of laws, policies, and industry guidelines. These rules must be followed by professionals and businesses that operate or want to operate in that sector.

Insurance is predominantly regulated by states, as opposed to the federal government in the United States. For this reason, rules and regulations can vary quite a bit from one state to another.

State insurance commissioners and regulatory bodies set the guidelines for insurance policies. They also provide licenses to insurance companies and brokers, as well as ensure that insurance companies are solvent. Like other insurance companies or professionals, reinsurance intermediaries and reinsurance managers must comply with state provisions covering the regulation of insurance and related activities. A license granted to a firm authorizes all members of that firm to act as reinsurance intermediaries.

Insurance regulators may treat insurance companies differently depending on whether they maintain an office in-state, considered a resident, or out-of-state, considered a nonresident. Regardless of the location of the insurance business, the broker or insurance company must be licensed to do business in a state. Licenses for businesses engaging in reinsurance may expire sooner than licenses granted to individuals.

Benefits of Licensed for Reinsurance Only

Being licensed for reinsurance only allows a firm to benefit from the insurance market without many of the issues related to selling insurance directly to consumers. Offering insurance is an interesting way to increase expected returns by taking on additional risk that has low correlations with conventional asset classes, such as stocks and bonds.

For example, a company offering fire insurance might take a big loss if there are more forest fires than usual in the western part of the United States in a particular year. While forest fires are not good for the U.S. economy, they are not significant enough to impact most stocks. Similarly, a stock market crash will not cause the number of fires to increase.

Diversification of risk is important for individual investors, as well as companies.

Being licensed for reinsurance only means firms do not have to appeal to retail consumers or deal with their complaints. Selling insurance to consumers is a competitive business, and many firms licensed for reinsurance only do not want to be involved. They only want to diversify their risks. The process of settling individual insurance claims is also often tedious and labor-intensive.

On the other hand, ordinary insurers also benefit from the ability to shift outlying risks to companies licensed for reinsurance only. The basic idea of insurance is that while great misfortunes are unpredictable for individuals, they can be predicted for large groups. The insurer can spread these risks around and profit from the risk aversion of their customers.

Unfortunately, the large groups themselves are occasionally subject to unexpected catastrophes, such as the widespread forest fires mentioned earlier. At that point, the insurers need reinsurance companies to back them up.