In a simple way, reinsurance could be described as « the insurers' insurance ».
In fact it is a contract by which a specialised firm (the reinsurer or the retrocessionaire) assumes part of the risks underwritten by an insurer (the ceding company) with its insured.
Through this operation, in case of the risk being effective, the reinsurer is committed to reimburse the insurer part of the amounts, assigned as losses and as counterpart receives a share of the original premiums paid by one or the insured.
In principle the reinsurer only treats with the insurers, it is why the activity is very often unknown from the public.
Why do the insurers reinsure themselves?
Just as an individual (an insured) must try to protect his assets (house, car...) and his closed ones against all sorts of hazards, an insurance company must equally measure and limit the exposure to its assets to avoid bankruptcy. So, every year it has to estimate its risks exposure, according to frequency and probability. Once this preliminary work is done, it can then better evaluate its reinsurance needs.
Buying reinsurance allows, via a transfer of some risks to:
- To give more homogeneity to the different kinds of underwritten risks
- To protect against the gaps in the results in space and time
- To limit the needs in equity
How to reinsure oneself?
There are two ways of reinsuring:
- « facultative » reinsurance
- In this case, it is a case of reinsuring individually a specific risk (for example a factory).
- « facultative » reinsurance is particular (as its name suggests) in the sense that it leaves the insurer the choice to cede or not the reinsurance, and to the reinsurer to accept or not the « named » reinsurance (no preliminary agreement).
- The « treaty » or « compulsory » reinsurance
- It is used to reinsure a community of risks (for example a whole motor insurance portfolio) rather than a single risk.
- In this case the reinsurance treaty is negotiated upstream (usually before the 1st of January every year, being the inception date for most treaties) and is compulsory that is to say it is an obligation for the insurer to cede all the risks of the concerned portfolio and an obligation for the reinsurer to accept them.
Who are the major global reinsurers?
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What turnover for worldwide reinsurance?
In 2017, worldwide reinsurance turnover represented roughly 250 US$ billions of which 65% were non-life business and 35% life. Contrary to Insurance, Reinsurance is essentially a non-life business.
What control over the European reinsurers’ solvency?
Insurance is, above all, a question of trust. The insured trusts his insurer when paying up a premium towards covering losses which might happen sometimes much later.
For a long time national institutions (such as the ACAM- French Insurance and Mutual Control Authority) have been put into place to check that the Insurer will meet his contractual commitments and they also regularly control the Insurance companies or mutuals' solvency (capacity to pay losses).
By ceding some of the underwritten risks to the reinsurance market (see above), at the same time the insurer transfers a share of the insolvency risk (or credit) to the reinsurers.
Until recently, the reinsurance activity was not regulated by any community legislation. Despite existing private firms (Rating Agencies) offering to evaluate the reinsurers' solvency, the non-existing state control could hinder exchanges in the single market and be a source of economic and legal uncertainty for all the European insurance players.
The 2005-68 directive published in the official journal of 9th December 2005, is creating a proper Reinsurance Community market by recommending a self control system largely inspired from the provisions in force in Insurance.
It notably puts forward the setting up of a consent system and of a financial control by the member State in which the supervised reinsurance firm has its head office. This consent will constitute "a unique passport" allowing to practice as a reinsurer in the whole of the European Union.
The new Directive also includes new requirements to guarantee the reinsurers financial strength and the market stability.
Where can you learn Reinsurance?
Following is an institution of the French market for learning the business of reinsurance.
The French National Shool of Insurance Group offers numerous courses for qualifications and degrees in Reinsurance (short or long training inter or intra- companies). In particular it has a Top Institute of reinsurance (ISR) which delivers the "reinsurance underwriter" degree, granted as Level II. All the courses call recognised experts in the taught different subjects: proportional, non-proportional reinsurance, Civil Liability), life, marine and transport, credit risk, etc.