You and I buy insurance to protect ourselves from all sorts of risks such as damage to our property or an accident. But who protects insurers? The answer is reinsurers. Insurers can mitigate risk by reinsuring policies they sell to you. This ensures the insurance company can meet their obligations if a claim occurs.
How does reinsurance work?
Reinsurance companies take a fee from each insurance company client and pool the funds in order to compensate them when a claim occurs. The process is similar to the way, insurance companies take a fee (known as an insurance premium) from their customers.
The ceding party (the insurance company) pays a premium to the reinsurer (often calculated as a fraction of the premium the insurance company receives from their customer). Reinsurers, in turn, will reimburse the ceding party if a claim should occur. Reinsurance, like regular insurance, is often purchased through a broker.
The advantage of reinsurance is that it allows insurers to reduce the potential impact of larger claims. This means that insurance companies can deliver services to more clients than they might otherwise be able to.
What are the different types of reinsurance?
While reinsurance can get very complicated, there are essentially three main types to be aware of:
- Treaty Reinsurance – this type offers general cover of a share of the policies as agreed upon by the ceding party
- Facultative Reinsurance – this type of reinsurance requires negotiation on a policy by policy basis
- Excess of Loss Reinsurance – this final type of reinsurance indemnifies the ceding party for any losses that exceed a specific limit.
In Australia, APRA is responsible for the regulation of the reinsurance industry. It is also compulsory for insurance companies in Australia to have a reinsurance management plan in place to make sure they are handling any potential liabilities responsibly.
For more information about what reinsurance requirements insurers need, you can visit the APRA website at https://www.apra.gov.au/.