Reinsurance

The concept of 'reinsurance' is quite an interesting one. It comes down to the same sort of logic as 'who will guard the guards?' - in this case who will insure the insurers. The answer is, other insurers.

The idea is similar to the fact that bookmakers who take a massive bet lay off some of the money with other bookmakers so that if they lose the bet they can offset their losses by getting some winnings back from another bookmaker they bet some of the money with. Similarly reinsurance allows insurance companies to manage their risk exposure by purchasing insurance from another insurance company. This process results in something called a reinsurance agreement being produced between the two companies.

Sometimes reinsurance might be offered by another insurance company or by a specialist reinsurance provider that only deals in that particular business.

Risk transfer or risk mitigation is clearly a very attractive reason to consider using reinsurance, but there are other reasons too that can make it an attractive proposition. One of these is to smooth income simply because reducing risk means that the size of any losses are subdued (as are possible gains) and so overall income can be smoothed. It may also be possible to arbitrage a position through the purchase of reinsurance in some cases, for instance it could be the case that the reinsurer has a cost advantage from the power of economies of scale, or simply be willing to take on more risk.

So that is a basic outline of what reinsurance is, and why many insurance companies look to it for various reasons.

Related Articles...

Payment Protection Insurance Until a few years ago, not many people would have heard of Payment Protection Insurance, commonly referred to as PPI. Now it is almost inescapable, with TV adverts and text messages bombarding... Van Insurance Most people know about car insurance, but what about van insurance? Clearly if you drive a van then you need to know about van insurance. There are various different types of van insurance which... GAP Insurance If you have bought a car in recent times, then you will probably have come across GAP insurance as the vendor will have asked you if you want GAP insurance or not. If you are not familiar with... Income Insurance Income insurance is sometimes referred to as income protection insurance. As the name suggests, this product is focused around what you earn from work. This type of policy is something that will... Motorbike Insurance Motorbike insurance might sound like a bit of a niche category of insurance, but there are actually a huge number of people who ride these sorts of vehicles, and so even within this there are... Flood Insurance Flood insurance is a specific product under the umbrella of insurance and it covers - as the name suggests - losses that occur due to flooding. In many cases, this form of protection (flood... Vehicle Insurance Vehicle insurance is the category of insurance products that cover, surprisingly enough, vehicles. These can be any sort of vehicle that you can think of, with of course the most common product... Home Insurance Home insurance is one of the most common types of insurance product, and anyone who has a home will be familiar with it. Home insurance is usually contrasted with contents insurance, which is a... Saving Money on Car Insurance Like with most types of insurance, the car insurance sector is extremely competitive. There are a lot of providers of this product, but also a lot of different factors that are taken into account to... Property Insurance Property insurance is a product that applies specifically to property, and has various different types of specific that are subsets of the general umbrella term 'property insurance'. Specific...