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...

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... 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... Life Insurance One of the most well-known types of insurance product is life insurance. And this does very much what it says on the tin - it insures against the life of a person. Thus, if the policy holder (the... Pet Insurance People love their pets - whether you are a cat lover or a dog lover, or prefer something like a rabbit, a guineapig, snakes, hamsters or indeed any animal that you can think of, then pet insurance... Prize Indemnity Insurance Prize indemnity insurance is a purchase that would be considered by someone offering a large prize and thus could stand to lose a considerable sum of money. This form of insurance would mean that... Bicycle Insurance Bicycle insurance, as with all insurance products, gives you a way to deal with the risk of having something happen to your bicycle - depending on the product you choose - and therefore having the... Crop Insurance There are two main types of crop yield insurance available, which come under the category of types of agricultural insurance product. It is self-explanatory what crop insurance guards against -... 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... Agricultural Insurance Agricultural insurance is a niche type of insurance product that is available for those who work in specific areas of agriculture. This type of product could offer piece of mind against various... 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...