Reinsurance can be defined in simple terms as 'insurance for insurers.' It is the insurance purchased by an insurance company to mitigate its risks and obligations to pay large claims. Reinsurer helps the insurer mitigate its risk by absorbing some of the losses. The insurance company, which is the insured in this case, is called the 'ceding party' or the 'cedent'. The reinsurer may be a pure play reinsurance company that underwrites only reinsurance or another insurance company. Reinsurers absorb full or a portion of the risk written by insurers. Absorption of risk by reinsurers also helps insurers keep the prices lower, at affordable levels for the policy holders. In a reinsurance contract, the original policy holder does not have any relevance. …show more content…
Similarly, insurance companies also need to mitigate their risks. They do so by buying reinsurance. The insurer pays a 'reinsurance premium' to the reinsurer. The reinsurer, because of his wide presence, will have a more diversified business, both in terms of risk and market reach. This helps the reinsurer take more business on his account books.
Loss Absorption
Reinsurer takes a portion of the risk that the insurer has underwritten. This is very useful in case of high severity claims such as natural catastrophes. In the absence of reinsurance, the insurer has to compensate all the claims. In case of natural catastrophes, the amount required to compensate the claims might exceed the premium amount, thus resulting in failure to compensate or bankruptcy of the insurer.
Capital Relief
Reinsurance allows the insurer to accept more business i.e., to underwrite more insurance with the same amount of capital base. This is because, for the portion of the risk indemnified by the reinsurer, the insurer need not allocate capital. Thus, it can use this freed-up capital to take up more business on to its account books. As the insurer takes up more business with the same level of capital base, it is spreading its overhead costs over a greater number of clients. This can help reduce the overall price of insurance to the
…show more content…
For this, reinsurance business needs to be operated as a global business with provisions for free capital flow across borders. In recent years, the Global Reinsurance market is experiencing a gradual fall in reinsurance prices. The two major reasons for this trend are:
• The losses due to natural catastrophes in recent years are much lesser than losses anticipated based on historical data
• Inflow of alternative capital into the Global Reinsurance market
As scale is more important, only a few large firms dominate the global reinsurance market. Also write small para about retrocession. The two main reasons are - benign loss activity and increasing capital inflow mainly alternative capital inflow.-- should this be kept in changing market landscape?
Reinsurers are important and vital players in the insurance market as a whole, as they help insurers offer --at affordable prices to clients.
In order to balance their portfolio Since reinsurers diversify their risk on an international level, diversification on a bigger scale is one of the reasons reinsurer are able to absorb peak risks and -- sever losses. Across a wide range of business
Underwriting is the assessment of risk that a potential customer may have, this allows the company to offer the customer a certain amount of coverage. This is something critical for
Firstly, the threat of new entrants is relatively low due to the high start-up costs and other resources to logistically operate an insurance company. RBC’s long history and establishment in the financial industry benefited them when they acquired other insurance companies to build their portfolio.
risk. So, to offset the risk they raise the premium. Which means it is more
There are three types of life insurance that most insurance companies offer, which are, universal, whole, and term. Universal life insurance is a permanent policy consisting of two parts, which are term insurance and an investment/cash value feature-which is interest bearing. The premiums for the plan allow the policyholder to pay a minimum rate when necessary or to pay the maximum and provide funds to the cash value of the policy. The more that’s paid into it, the bigger the investment/return. With the cash value of the plan, fees are deducted for the costs of the plan and the policyholder receives payment from the interest of the remaining balance. Universal offers clients a definite minimum interest rate on the cash value. Some insurance companies offer a tiered interest rate that pays policyholders a fixed percentage up to a certain amount, then a higher interest rate on balances above that threshold.
Massumi, Brian. "The half-life of Disaster." The Garudian 15 4 2011. online. The New York Times . 25 April 2014.
Insurance companies exist to make money. They are not concerned with your needs which include great coverage at an affordable price. Their agenda consists of offering superfluous offers, causing you as a customer to lose money on frivolous items that won’t ever benefit you.
Rousmaniere, Peter. “Facing a tough situation.” Risk & Insurance 17.7 (June 2006): 24-25. Expanded Academic ASAP. Web. 23 March 2011.
People purchase insurance policies to help protect themselves and their property in the event of a catastrophe of loss. If a catastrophe or loss occurs, the person who owns the insurance policy will submit a claim. The person submitting the claim is called a claimant and a claim is basically requesting for the insurance company to reimburse them for their loss. A claims adjuster works with the claims that people file in those situations (Bureau of Labor Statistics 1).
...e covering for example hail, frost, and floods, or yield insurance which covers all climatic risks. Combined risk insurances cover most risky events that can affect the crops but they do not cover against systematic risk which requires high level of reinsurance costs and can be covered only if there is public support or public reinsurance. Systematic risks or risks affecting vast regions or a lot of farmers used to be non-insurable due to the high magnitude of the indemnities. But the yield insurance covers all kinds of climatic risks including droughts, storms, frosts, fires, hail. In some places (not in Europe) it can cover even against plant diseases and pest. Since the demand for agricultural insurances is growing, the market is expanding and different instruments like index insurance products, weather derivatives and weather options are already in circulation.
The risk mitigation activities for this company should involve learning on the trends of the industry so as to make sure that they remain competitive. This will make their finances to perform consistently well and investors will be impressed and invest even more. As well, the company should do research on shows hat that
To minimize the chances of such disasters, humans engage in risk assessment. We calculate the chances of each choice resulting in an unfavorable outcome, rank the choices from lest to most likely to end in disaster and pick the top result. This process is performed countless times throughout one’s life, but hardly ever consists of an actual mathematical equation. However, there are some who do quantify risk numerically. Actuaries use the ideas of probability and game theory to objectively assess the risk in a variety of chances. They may calculate the risk of one’s house being flooded, or of one falling ill. They may calculate the risk of an investment losing money, or of a plane crashing. Actuaries implement the ideas of applied mathematics for those who cannot do so themselves, and eventually figure the means by which a client can minimize the risks facing them. Yes, actuaries do figure insurance rates, but they also do so much more. As I researched the field of actuarial science, I decided that actuary should be synonymous with mathematical risk manager, for actuaries are responsible for figuring risk, minimizing risk, and minimizing the impacts of disasters that have already occurred. They complete these tasks objectively and with the power of my favorite subject, mathematics.
Catastrophe bonds are a new type of insurance securitization and have become increasingly popular in the insurance industry throughout the 21st century. Unlike traditional reinsurance products, cat bonds are “fixed income instruments issued primarily by insurers and reinsurers as a way of passing on their exposure to potential large financial risks associated with natural catastrophes” (Ip). in the form of an insurance linked security. These securities are designed to protect insurers and reinsurers against “super” catastrophes, or events that are high severity, but low frequency of occurrence, defined as having around a 1% or 1 in 100 years probability. Cat bonds first emerged in the 1990s, after hurricane Andrew and the Northridge Earthquake in California wiped approximately USD 30 billion off balance sheets of insurers and reinsurers. Insurers and reinsurers noticed the industry’s vulnerability to such “super” catastrophes. “The potential cost of a disaster had outgrown the capacity of the insurance industry to protect against it” (Ip). Reinsurers had to increase equity levels in order to protect against a natural disaster which increased the price for catastrophe risk. Although catastrophe bonds have parameters which strictly limit the type and location of a disaster they cover, cat bonds have had a positive impact on the insurance industry because cat bonds add reinsurance capacity through the financial market, cat bonds influence the price of traditional reinsurance, and cat bonds enable regional insurance carriers to expand underwriting.
Another effective way to reduce risk is for companies to purchase business-interruption insurance. This type of insurance used to be generally easy to obtain. Today, insurance companies require a lot more information before providing the service to companies. Not only do they require more information on a company's suppliers, the insurers also require that you have a list of multiple suppliers that, if an isolated disaster or accident occurs, wouldn’t all be affected. Companies need to maintain their JIT processes, eliminate redundancies, and at the same time keep a minimum number of suppliers to minimize risks.
"1- The name of the insured, or of some person who effects the insurance on his
...is event ‘ just a coincidence because several small earthquakes happened before the big one’ ( Zhang, 2008), but it proved that if we can predict hazards accurately, much loss can be saved.