The tenets of reinsurance

 

The basic tenets and concept of insurance are becoming matters of priority among many policy holders as more people become aware of the benefits of insurance. However, the task at hand is how to go about increasing the awareness and comprehension of reinsurance, which to date is still perceived as a foreign, if not a challenging concept to grasp for many people. The issue with this lack of awareness and comprehension is a consequence of the limited information or rather the lack of rigor with which masses are enlightened about reinsurance in terms of what it entails and what benefits it entails. This article seeks to provide an overview of reinsurance in the most simplistic of terms. 

For starters, reinsurance has been arguably one of the better aspects of the insurance industry in terms of returns and performance. In essence, the perks of reinsurance are such that they provide stability in cases where losses are inevitable in situations where the percentage of policy holders looking to repair damages is increasingly high. Reinsurance especially comes in handy in situations where catastrophes are the order of the day. Looking at it from a perspective where the number of claims is overwhelmingly large in a limited period, reinsurance becomes a source of refuge especially to insurance companies that may not have the financial muscle to pay the claims and still maintain operations. 

Insurance is a risky business in that the level of financial risk is considerably high, considering that for events such as natural calamities in which a great deal of policy holders may claim damages, an insurer may be subject to financial constraints in trying to settle such claims. However, reinsurance is an effective way of mitigating such constraints in the sense that the insurer is better positioned financially to not only settle with the policy holders but is further able to carry on with the firm’s operations without financial hitches. 

To this end therefore, reinsurance spreads the risk of the insurer over several companies. Essentially, reinsurance reduces the risk of insolvency and goes as far as helping the insurer take on more policy holders. More subtly, reinsurance increases the capacity of an insurance firm, which is advantageous in terms of returns. Further, the basic tenet of reinsurance especially to the insurer is to eliminate the fear among policy holders that the insurer may be underhanded in terms of paying out claims when the percentage/number of claimants is high.

It is worth noting that over the years, the reinsurance industry has successfully consolidated and diversified in that the topmost diversified companies globally that are within the reinsurance industry have maintained, if not surpassed, their market share and profitability. This goes to prove the effectiveness and muscle of reinsurance firms. 

Facultative Reinsurance

Facultative reinsurance is facilitative in nature and encompasses reinsurance for a single risk or for a defined package of risks.  Markedly, with facultative reinsurance, the cedant (primary insurer/insurance company) is not under any obligation to submit or transfer the risks to the insurer and the reinsurer is not compelled to provide protection for the ceded risks. In this case, the cedant volunteers to perform underwriting on some (partially) or on all of the policies that are to be insured on their own. Facultative reinsurance is mostly a one-off transaction. This type of reinsurance is not particularly attractive to the primary insurer in the sense that the cedant may be forced to retain the riskiest packages. 

Treaty Reinsurance

This type of reinsurance is a stark contrast to facultative reinsurance in the sense that with treaty reinsurance, the cedant agrees to cede all risks within a defined/specified class of insurance policies to the reinsurer and in return, the reinsurer is compelled to indemnify the primary insurer of all the ceded risks in the given/specified insurance class. With treaty reinsurance, the reinsurer is obliged to indemnify all the risks despite not having written each of the risks individually. One aspect of this type of reinsurance is that the underwriting risks from the primary insurer are transferred to the assuming company. In this case, the assuming company bears the burden of ascertaining whether or not the risks to be insured were effectively evaluated during the underwriting process. 

It is important to note that the sharing of premiums, risks, and losses between the cedant and reinsurer varies depending on the structure in terms of whether the form is proportional or non-proportional. For more information and clarity on the tenets of reinsurance, please do speak to your local Minet broker. 

Joy Njuki ǀ Senior Account Executive ǀ Minet Kenya