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Reinsurance - What is it?

Reinsurance is "insurance for insurance companies". It helps a primary insurer (like Chubb, St. Paul, Travelers) protect against extraordinary losses. As an example, you might have a St. Paul package policy with property coverages totaling $20 million. Although you pay your premiums to St. Paul and if there is a claim, St. Paul reimburses you, St. Paul might only cover 20% of the property values with reinsurance companies covering the remaining 80%. St. Paul pays the reinsurer a portion of your premium to cover the reinsured exposure. In this way, reinsurance helps to spread the insurance industry's losses, it increases individual insurers' capacity and helps insurers stabilize their business from the wide swings in profit and loss margins.

Reinsurance is a global business and this further helps to spread risk. If you refer to the list of carriers and their estimated losses, there are several reinsurance companies listed. The largest estimated losses are by Swiss Re , Munich Re and Gen Re. Without these reinsurers and the Lloyds of London syndicates, insolvency of some of our primary domestic insurers would be a certainty.

Since primary insurers are obligated to pay policyholder claims, it is imperative that they select reinsurers with strong financial statements, good underwriting and management practices and prompt claim payments. Reinsurance is a necessity in today's world. Without it, primary insurers would only be able to cover the very safest ventures, leaving a vast majority of personal, business and financial risks, uninsured.