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What Is Reinsurance?

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  • Written By: Ken Black
  • Edited By: Andrew Jones
  • Last Modified Date: 01 September 2014
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Reinsurance is the practice of mitigating insurance risks by sharing those risks with another insurance carrier in exchange for paying that other carrier a part of the premium. The practice makes it possible for larger policies to be written, but still have the protected party only deal with the main insurance provider. This simplifies things for the customer and generally does not affect rates. The practice of reinsurance could date back to as early as the 1300s.

Typically, reinsurance is applied to larger insurance policies, but companies may also engage in the practice when they do not specialize in a particular insurance product. For example, if a policy is packaged to include health insurance for employees and worker's compensation insurance, the company bidding may feel more comfortable having some other company handle one of those two divisions. This not only helps to minimize risks to a single company, it also provides the opportunity for a company with more expertise in a certain area to step in and handle those matters.

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Despite this apparent benefit, the main reason for reinsurance remains risk mitigation. For example, if a company has a very large policy, or a number of smaller high-risk policies, those policies may generate a great deal of revenue, but could cause a catastrophic liability if a major disaster were to take place. Therefore, for the overall health of the company, it may seek others to share that risk, and pay those companies part of the premium proportionately equivalent to the risk they assume.

While nearly all insurance companies have a reinsurance program, there are some that also specialize in the practice. They specifically seek out other companies who have already sold policies and offer to take on the risk for a certain premium level. These companies may not be well known by name because they are not often in the consumer market, and therefore do not maintain a large public presence. Further, claims may still be paid by the major carrier who first wrote the policy, even if the payment is coming from some other company.

The exact origin of reinsurance is unknown, but the earliest reports date back to the late Middle Ages. Then, companies who focused in insuring maritime voyages sought others to share the risk because of all the unknowns involved. Further, ships and cargo often had very large values for the time, so companies often were not willing to take a risk unless others could step in to share the risks and rewards.

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hamje32
Post 3

@miriam98 - I had no idea that all insurance companies had a reinsurance program already in place. If that’s the case, they should have nothing to complain about, in my opinion. They have already spread their risks to accommodate catastrophic events, and should be able to keep their premiums under control.

miriam98
Post 2

@everetra - Actually this sounds quite similar to the health insurance exchanges that have been proposed. These exchanges are state run and allow different insurance companies to participate in the exchanges.

The reasoning is the same. By allowing multiple companies to participate it should help to bring down the costs of healthcare premiums. I don’t know how well it will work in practice but it sounds like it would encourage spreading risk with everyone getting involved.

everetra
Post 1

I think that reinsurance sounds like a good idea. If you can mitigate risk, you stand a good chance of being able to bring costs down. That opens the door to more people being able to afford health insurance, even people with high risk conditions.

Traditionally these people have had to opt for expensive policies if they had serious health issues. With the reinsurance these high risk individuals could access policies at reasonable rates, at least in theory anyway.

I don’t know how widespread the practice of reinsurance is, but it’s surprising and somewhat encouraging to learn that it goes back a long time. I think we definitely need new ideas in the healthcare market.

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