ReinsurancePosted January 23rd, 2012
Why is this Topic Important to Financial Professionals? A basic understanding of reinsurance will help the financial professional better understand how alternative risk transfer structures can benefit clients. Exposure to the concepts allows fundamental understanding that enables advanced planning.
Reinsurance as defined by Black’s Law Dictionary means, “[i]nsurance of all or part of one insurer’s risk by a second insurer, who accepts the risk in exchange for a percentage of the original premium.” Or in other words, “[r]einsurance is a transaction in which one insurance company indemnifies, for a premium, another insurance company against all or part of the loss that it may sustain under its policy or policies of insurance.”
What are some common examples of reinsurance structures?
- Excess lines coverage, in that the risk from the first layer of coverage (let’s say up to $100,000) could be held by one insurer while the excess for a claim of over the threshold could be covered by another insurer, in essence, the first insurer has reinsured the risk of over $100,000 to another party.
- Fronting-“[a]rrangements by which an insurer, for a specified fee or premium, issues its policies to cover certain risks underwritten or otherwise managed by another insurer or reinsurer. The insurer then transfers all, or substantially all, of the liabilities thereunder to such insurers by means of reinsurance.”
How does reinsurance relate to small business and alternative risk transfer prerogatives?
Non-traditional risks can commonly be reinsured. If for example, a business were to form or operate a captive insurance company, the company may still employ a way to “lay-off” some of the risk and liability the insurance company just undertook. The secondary insurance market, or another name for buying and selling reinsurance, is priced differently than the traditional insurance market. Some claim that one benefit of alternative risk transfer plans is access to this reinsurance market.
Reinsurance is all about managing the risk appetite of the business though a comprehensive insurance management plan. “Reinsurance, particularly excess of loss reinsurance,” is generally, “characterized by low claims frequency and high loss severity.” Some benefits reinsurance as it relates to risk management are: 
- Limiting Liability – amount of risk retention can be determined and set
- Asset Stabilization- risk of loss transferred to another
- Catastrophe Protection-allows for coverage of large risks though risk sharing
- Increased Capacity / Cash- assigns obligations that may not be funded
 Black’s Law Dictionary (8th ed. 2004), reinsurance.
 Reinsurance Association of America. “Fundamentals Of Property and Casualty Reinsurance” Introduction To Property And Casualty Reinsurance. http://www.reinsurance.org/i4a/pages/index.cfm?pageid=3310. Last Accessed 8/26/2010.
 Reinsurance Association of America. “Glossary of Terms” http://www.reinsurance.org/i4a/pages/index.cfm?pageid=3309. Last Accessed 8/26/2010.
 Reinsurance association of America “Fundamentals Of Property and Casualty Reinsurance”. Pg. 10.
 “Fundamentals Of Property and Casualty Reinsurance” Purposes Of Reinsurance. http://www.reinsurance.org/i4a/pages/index.cfm?pageid=3310. Last Accessed 8/26/2010.