What is Reinsurance Recoverables
Reinsurance recoverables are the portion of an insurance company’s losses from claims that can be recovered from reinsurance companies. Reinsurance recoverables includes the amount owed to the insurer by the reinsurer for claims and claims-related expenses, the amount owed for estimated losses that have occurred and been reported, the amount of incurred but not reported (IBNR) losses and the amount of unearned premiums paid to the reinsurer.
BREAKING DOWN Reinsurance Recoverables
Insurance companies primarily make money from their underwriting activities. When an insurer underwrites a new policy, it collects premiums from policyholders, but it also takes on the liability associated with providing the coverage. Insurance regulators require insurers to set aside reserves in order to cover potential claims made against the policies that the insurer underwrites. The insurer will find its underwriting activities limited by how much risk it can handle. One way an insurer can reduce its risk exposure is by sharing some of this risk with reinsurance companies. Essentially, the insurer is purchasing insurance to cover a risk.
Reinsurance companies agree to take on a portion of the risk associated with the policies that an insurance company underwrites in exchange for a portion of the premiums. The reinsurer is, in effect, agreeing to reimburse the insurer for losses associated with the risk that it takes on.
While using reinsurers can help insurance companies reduce their risk exposure, it can leave the insurer open to new types of risk. A company that is over reliant on reinsurers can find itself in a difficult situation if reinsurers start demanding higher fees. The insurer also runs the risk of the reinsurer not being able to pay for the settlements to which it has agreed. Insurers with large reinsurance recoverables to policyholders’ surplus may find that a portion of the reinsurance recoverables is uncollectible.
Reinsurance Recoverables and Balance Sheets
Reinsurance recoverables can be among the largest assets on an insurance company's balance sheet. The purchase of reinsurance creates a potential claim on the reinsurance company in case of claims by underlying insured parties. Reinsurance is usually seen as a reduction in liabilities, and reinsurance recoverables are considered an asset. In some places, primary insurers must keep collateral from reinsurers as a condition of the recoverable being recognized as an asset. Different companies in different businesses purchase various levels of reinsurance, according to their individual risks and market conditions. While reinsurers historically covered only non-life risks, they've recently taken an interest in reinsuring life risks, which has driven growth.