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...

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... 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... 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... Contents Insurance Contents insurance is a type of insurance product that covers the items that you have - the contents - of your home. There are a range of different providers of contents insurance out there on... Types of Car Insurance There are various different types of car insurance product that are available in the UK. The minimum level of cover that is available to meet legal requirements is a product called third party... Saving on Home Insurance Home insurance splits into the bricks and mortar insurance - buildings insurance - and the stuff that you put inside your house such as your valuables - the contents, hence that bit is called the... 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... What Is Insurance? What exactly is insurance? It sounds like a very basic concept, but it is important to know what insurance is, in order to work out why insurance is so essential to modern-day activities, and why... 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... Travel Insurance One of the most common forms of insurance product is travel insurance. Wherever there is travel involved, there is invariably risk, and infact a range of risks, and therefore an insurance product...