Understanding What Are Reinsurers and Their Functions

Reinsurers are essentially backup insurance companies that help primary insurance companies manage their risk and financial burden. They provide financial support to primary insurers in case of large losses or claims.

Primary insurance companies often take on a lot of risk when they issue policies to their customers. This is where reinsurers come in, helping to share that risk and prevent financial ruin.

Reinsurers don't directly deal with policyholders, instead working behind the scenes to support primary insurers. Their main goal is to help insurers stay financially stable and continue to provide coverage to their customers.

Reinsurers can be thought of as a safety net for primary insurers, helping to mitigate the financial impact of large losses or claims.

Reinsurance programs are designed to reduce insurance companies' exposure to loss by passing part of the risk to a reinsurer or a group of reinsurers.

Almost all insurance companies have a reinsurance program to remain solvent and recover amounts paid out to claimants.

Reinsurance reduces the net liability on individual risks and provides catastrophe protection from large or multiple losses.

It also gives insurers the chance to increase their underwriting capabilities in number and size of risks.

Ceding companies, which are insurance companies that pass their risk on to another insurer, can rely on reinsurers to help cover extreme losses.

Primary insurers, which work directly with policyholders, can mitigate the risk of financial calamity by taking out their own policies with reinsurance companies.

Reinsurance helps spread the risk across several insurers, protecting both policyholders and insurance companies from excessive losses.

State regulators are responsible for regulating reinsurance companies incorporated within their borders to ensure solvency and proper market behavior.

Reinsurance gives insurers more security for their equity and solvency by increasing their ability to withstand the financial burden when unusual, major events occur.

Through reinsurance, insurers can underwrite policies covering a larger quantity or volume of risk without excessively raising administrative costs to cover their solvency margins.

Reinsurance makes substantial liquid assets available to insurers in the event of exceptional losses.

The Reinsurance Association of America promotes a regulatory environment that ensures the industry remains globally competitive and financially robust.

Reinsurance allows insurers to issue policies with higher limits than would otherwise be allowed, transferring some of that risk to the re-insurer.

Reinsurance comes in two basic categories: treaty and facultative. Treaty reinsurance covers broad groups of policies, like all a primary insurer's auto business, whereas facultative covers specific individual, high-value or hazardous risks.

Facultative reinsurance involves renegotiating separate agreements for each risk or contract, giving the reinsurer all rights to accept or deny a proposal. Treaty reinsurance, on the other hand, is a set period agreement that covers all or part of the risks the insurer may incur.

There are also different types of reinsurance agreements, including proportional and non-proportional. Proportional reinsurance, also known as "pro rata", requires the reinsurer to take on a percentage of the primary insurer's premiums and losses. Non-proportional reinsurance, also known as "excess of loss", only pays out if the claim exceeds a predetermined threshold.

Here are the main types of reinsurance agreements:

Ultimately, the type of reinsurance agreement chosen by an insurer depends on its specific needs and risk management goals.

There are two main types of reinsurance: facultative coverage and reinsurance treaties.

Facultative coverage protects an insurer for an individual or a specified risk or contract.

A reinsurance treaty, on the other hand, covers all or part of the risks that the insurer may incur for a set period.

The reinsurer holds all rights for accepting or denying a facultative reinsurance proposal, making the decision a crucial one.

In a reinsurance treaty, the reinsurer covers multiple risks or contracts at once, often resulting in a more streamlined process.

Under proportional reinsurance, the reinsurer will receive a stated percentage of the premiums and pay the same percentage of claims. The ceding company may allow a "ceding commission" to the insurer to cover costs and expected profit.

A quota share arrangement is a type of proportional reinsurance where a fixed percentage of each insurance policy is reinsured. For example, a ceding company might reinsure 75% of each policy. The ceding company retains the full amount of each risk, up to a maximum retention limit, and the excess is reinsured.

The ceding company may seek a quota share arrangement to increase the amount of business it can sell. By reinsuring 75% of its business, it can sell four times as much and retain some of the profits on the additional business.

Proportional reinsurance can be used to limit losses from a small number of large claims. For example, a 9 line surplus treaty might involve the reinsurer accepting up to $900,000, with the ceding company retaining all premiums and losses from policies up to $100,000.

Here's a breakdown of the different types of proportional reinsurance arrangements:

Facultative reinsurance is a type of reinsurance that protects an insurer for an individual or a specified risk or contract, requiring underwriting around each individual risk. This is in contrast to treaty reinsurance, which covers broad groups of policies.

Facultative reinsurance typically involves high-risk events and property, such as hurricanes and skyscrapers. The reinsurer holds all rights for accepting or denying a facultative reinsurance proposal, making it a more tailored approach.

Facultative reinsurance can be further divided into two agreement categories: proportional and non-proportional agreements. With a proportional agreement, primary insurers and reinsurers share both the premiums and the potential losses.

Here are some key characteristics of facultative reinsurance:

Facultative reinsurance is often used for high-value or hazardous risks, such as hospitals, that wouldn't be acceptable under a treaty. This type of reinsurance allows insurers to manage their risk more effectively and create a more balanced and homogeneous portfolio of insured risks.

Reinsurers often purchase contracts known as facultative reinsurance, which can be written on either a proportional or excess of loss basis. This type of contract is typically purchased by the insurance underwriter who wrote the original policy.

A facultative certificate is a relatively brief contract used for large or unusual risks that don't fit within standard reinsurance treaties. These contracts are often used for policies that have specific exclusions.

The term of a facultative agreement coincides with the term of the original policy, meaning it lasts for the entire lifetime of the policy. Reinsurers usually purchase facultative reinsurance to cover their liability for the original policy.

Reinsurance treaties can either be written on a "continuous" or "term" basis. A continuous contract has no predetermined end date, allowing either party to cancel or amend the treaty with 90 days' notice.

Everest Re is a great example of a reinsurer that serves customers globally. It operates in over 100 countries across six continents.

Everest Re has an impressive track record, with a net premium written of US$8.9 billion. This success is reflected in its A+ ratings from A.M. Best and S&P, a testament to its disciplined and focused approach to risk management.

With a president and CEO like Juan C Andrade, who has close to 30 years of experience in the insurance industry, Everest Re is led by someone who truly understands the business.

Certified reinsurers are a special group of companies that meet the Texas Department of Insurance's (TDI) strong financial criteria.

These companies are allowed to provide a reduced amount of collateral because they agree to provide information to TDI. This gives TDI more oversight of the reinsurer.

TDI certifies reinsurers through two forms: CR-F Reinsurance - Property/Casualty Business (Form FIN191, Excel) and CR-S Reinsurance - Life Insurance, Annuities, Deposit Funds and Other Liabilities, and Accident and Health Insurance (Form FIN192, Excel).

Here are the forms and instructions for certified reinsurers:

Canada Life Re is a global leader in risk management, with a disciplined and focused approach that has earned it A+ writings with both A.M. Best and S&P.

It serves customers in over 100 countries and six continents, a testament to its global reach and expertise.

Canada Life Re was founded in 1989 and has since grown to offer a range of reinsurance products, including structured, traditional, longevity, and P&C reinsurance.

Its President and CEO, Jeff Poulin, has a deep understanding of the industry, having worked his way up through the ranks since joining Canada Life as an Actuarial Assistant in 1988.

Canada Life Re writes over US$23.4 billion in net premiums every year, a significant portion of which is over US$20 billion in structured, traditional, longevity, and P&C reinsurance.

China Reinsurance Group is a Beijing-based reinsurance group with a presence in over 100 countries. It's the only state-owned reinsurer in China, giving it a strong position domestically.

China Re partners with 1,000 different companies to offer reinsurance services across multiple insurance lines. This extensive network has made it a leader in reinsurance within China.

Its strong domestic position has earned China Re a spot among China's insurance elite, joining companies like Ping An.

Berkshire Hathaway is a giant in the reinsurance industry, with net written premiums of about US$20bn a year.

It's impressive to think that Berkshire Hathaway was once a failing textile company, but Warren Buffett's vision and leadership transformed it into a massive industrial firm.

Berkshire Hathaway entered the insurance market in the 1960s by buying the National Indemnity Company, which marked the beginning of its significant involvement in the reinsurance sector.

Today, Berkshire Hathaway offers reinsurance solutions across many of the insurance lines where it operates, utilizing its vast resources and expertise to provide comprehensive coverage to its clients.

Hannover Re is a German reinsurance company headquartered in Hannover, with a mission of "turning risks into investments". It was established in 1966.

The company transacts all lines of P&C, Life, and Health reinsurance. It's present on all continents except Antarctica.

Hannover Re has over 3,500 staff worldwide. It has a network of over 170 subsidiaries.

The company is led by Jean-Jacques Henchoz.