12 February 2013 0 Comments

What is Re-Insurance?

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Re-insurance is employed in all types of insurance:  Life, property and casualty, disability, even “hole-in-one” type policies.  A friend of mine specializes in that type of coverage, where a sporting team or corporate sponsor offers to pay a huge sum of money if a participant makes a hole-in-one or sinks a basket from center court.  The sponsoring entity is not willing to risk paying off the entire sum to a winner, so they pay a premium to my friend’s company.  Virtually all of that risk is re-insured.  I’ll restrict my discussion to the reinsurance of life insurance, though many of the same principals apply to all types of re-insurance.

You purchase a life insurance policy from the company that will issue your policy.  We’ll call that the primary company.  As the owner of the life insurance policy you look to the primary company to fulfill the commitments made in your policy.  However, the primary company very often cedes part of their obligation to a third party—a re-insurance company.  It will not be evident to you that any portion of your policy has been ceded to a re-insurance company.  This information will not appear on your policy.  Re-insurance companies actually provide insurance for your primary insurance company.  The contract is between the primary, ceding company and the re-insurance company and has nothing to do with your contract with the company issuing your policy.

An insurance company may cede all or a portion of their risk to re-insurance companies for one, or more, of the following reasons:

  • In order to issue a policy whose face amount exceeds their retention limit that has been approved by state insurance commissioners,
  • To enhance their surplus position,
  • To spread their risk,
  • To improve premiums when their underwriting does not produce an acceptable offer.

It’s not that important that a consumer know all of the details of the above purposes for re-insurance.  But, it can be important to understand the underwriting aspects of reinsurance and so that’s what I’ll be covering in my next edition…

Re-insurance (Continued) coming up.

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