Reinsurance Assisted Placement

Reinsurance Assisted Placement

Investopedia / Michela Buttignol

What Is a Reinsurance Assisted Placement?

A reinsurance assisted placement is a new reinsurance contract initiated by a reinsurance company. Reinsurance is insurance for insurers (also called stop-loss insurance). A reinsurance company is one that provides financial protection to insurers. Reinsurers handle risks—namely, a major claims event—that are too large for insurance companies to handle on their own.

While a reinsurance assisted placement is initiated by a reinsurance company, the majority of insurance contracts are initiated either by insurance companies or by insurance brokers. Reinsurance companies may be motivated to generate reinsurance assisted placements if they believe that the insurance company to whom they direct the business will then purchase reinsurance from them.

Key Takeaways

  • A reinsurance assisted placement is a type of referral that is made between insurance companies.
  • A reinsurance assisted placement takes place when a reinsurance company refers a new insurance contract to an insurer.
  • The insurer will typically then reinsure that contract with the reinsurance company that made the referral.
  • Depending on the nature of these parties' reinsurance arrangements, the insurer may not be obligated to reinsure the contract with the company that made the referral.

How Reinsurance Assisted Placements Work

The reinsurance marketplace is a large and important part of the insurance industry. By purchasing reinsurance, insurance companies can manage their risk by offsetting a portion of their liabilities to other insurance companies. The companies accepting this risk—that is, those who are selling reinsurance, the reinsurance companies—are compensated by receiving a portion of the insurance premiums collected from the policyholders.

When entering into these arrangements, the two parties will negotiate around what is a reasonable level of insurance premiums for the insurer to cede to the reinsurer. This decision will be based on the perceived riskiness of the underlying liabilities, as well as on the type of reinsurance contract being considered.

Types of Reinsurance Assisted Placements

Most reinsurance contracts can be divided into two different categories: treaty and facultative. Treaty contracts are agreements that cover a broad group of policies, such as all of a primary insurer's auto business. Facultative covers specific individual policies, such as a hospital, that would not be accepted under a treaty because they represent higher value policies or more hazardous risks.

For example, clash reinsurance contracts give insurers additional coverage in the event that a single loss event results in more than one policyholder filing a claim. Spot reinsurance, on the other hand, covers a subsection of the insurer's policies when that subsection is deemed to be riskier than the insurer's overall portfolio of policies.

Most of the time, the insurance contracts that are then reinsured are initiated either by the insurance company themselves or by one or more insurance brokers. However, there are cases when the reinsurance company will initiate, or "place," a new insurance contract on behalf of an insurance company. In that scenario, the insurance company may either choose to reinsure the contract with the reinsurance company, or else work with a different reinsurance provider.

In the case of treaty reinsurance, the insurance company would be obligated to reinsure with the company that provided the reinsurance assisted placement. In the case of facultative reinsurance, however, the insurance company could choose whether or not to reinsure with that particular company.

Example of a Reinsurance Assisted Placement

To illustrate, consider the case of two hypothetical insurance companies: Insurance Corp. and Reinsurance Corp. The two companies have done business with each other for many years, with Insurance Corp. regularly purchasing reinsurance from Reinsurance Corp. Although most of Insurance Corp.'s new contracts are generated from its own salespeople, as well as its network of insurance brokers, from time to time Reinsurance Corp. will come across its own business opportunities and refer those customers to Insurance Corp.

Because the two companies have a facultative reinsurance arrangement rather than a treaty reinsurance arrangement, Insurance Corp. is not obligated to deal with Reinsurance Corp. when purchasing reinsurance for its reinsurance assisted placements. However, since the two companies have a good working relationship, it almost always chooses to do so. In this sense, Reinsurance Corp. is acting as a de-facto insurance broker for Insurance Corp., in addition to acting as a reinsurer.