H. Insured: When the insurer insures itself!


I once had to explain the concept of reinsurance to someone, and it made sense to explain it simply as when insurers take insurance. Reinsurance is basically insurance for insurance companies. It is a way of transferring part of the financial risk insurance companies assume in their line of work to another insurance company or a reinsurance company. Here, I try to break it down for easy understanding.

Here’s a scenario. When an insurance company issues an insurance policy, a motor insurance policy, for example, it assumes responsibility for paying for the cost (also known as claim) of any accidents that occur, within the terms and conditions of the policy. Now, by law, an insurer must be capable of paying all valid claims related to the policies it issues. This requirement protects clients but limits the amount of business an insurer can take on. That’s not so exciting for insurers, right?

There’s a way to resolve the challenge of an insurer’s business capacity being limited. If the insurer can reduce its responsibility, (aka liability), for these claims by transferring a part of the liability to another insurer, then it can write more insurance policies?! Exactly. That’s what reinsurance is all about.

Let’s get technical.

The company that issues the policy initially is known as the primary insurer. The company that assumes liability from the primary insurer is known as the reinsurer. Primary companies are said to “cede” business to a reinsurer. Reinsurance companies on the other hand reinsure with other reinsurance companies known as “Retrocessionaires” (Thankfully, we don’t have to use that word too often😊)

It’s not just about insurers, though. There are also risk management options for people who want to be extra careful. It’s called “Coinsurance”. This is when a policyholder decides to insure his/her property with two or more insurance companies at agreed proportions. In the event of a loss, these companies would then contribute towards the total claim in the same proportion in which they received premium. Nice!

Some more technical language for you, but useful to know.

There are two types of Reinsurance agreements: Treaty and Facultative Reinsurance. Treaty agreements cover broad groups of policies such as all of a primary insurer’s motor, accident, fire, marine and aviation businesses. These are normally arranged with a single or a number of reinsurance companies at the beginning of each financial year to protect the primary insurer’s policies that would fall within the agreement.

Policies which may fall outside the treaty agreement are generally placed on Facultative basis, this covers specific individual insurance policies that would not be accepted under a treaty agreement. The insurer would then decide on which reinsurer to seek support from and at what proportion.

What’s the big deal about reinsurance, you ask?

Essentially, buying reinsurance is one of the most important risk management strategies for insurance companies hoping to protect themselves from unpredictable claim challenges while securing themselves from spending all their profits on paying claims.

When the insurer insures insurance (benefits of Reinsurance):

  1. Protection against catastrophes and natural disasters: especially for areas with large numbers of high-risk policies. For places that are often plagued by wildfires, flood, etc. the insurance companies covering these areas face the potential of paying out huge numbers of claims should a disaster strike. Reinsurance helps soften the potential blow.
  2. Reinsurance allows the primary insurer to write more policies having in mind the availability of reinsurance protection.
  3. Reinsurance helps reduce risk: When an insurance company singularly insures many clients and their property, they take on a huge amount of risk. Reinsurance is a great strategy to reduce that risk, placing some of the burden on a reinsurance company instead of shouldering the burden completely alone.

In Ghana, it is a regulatory requirement to have appropriate reinsurance arrangement to be able to acquire a license to operate. In the absence of reinsurance arrangement for an insurance company, a single loss can wipe out the entire capital of the insurance company. Thank goodness companies like Hollard have great reinsurance relationships to handle all capacities of insurance policies.

>>>The writer is a reinsurance officer at Hollard Insurance

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