Magazine article Risk Management

Ignore Reinsurance at Your Peril

Magazine article Risk Management

Ignore Reinsurance at Your Peril

Article excerpt

Traditionally, insureds have little to do with reinurers, even those who have taken on some of their risk. Reinsurance is really insurance for insurance companies. So even though you probably do not have a contractual relationship with reinsurers, or feel compelled to know much about them, ignore them at your peril.

Since insureds buy coverage from insurers and insurers then buy coverage from reinsurers, it would appear that insureds can afford to be indifferent to the insurers' behind-the-scenes reinsurance deals. Unfortunately, it is not that simple anymore. Discounting the importance of the vital role of reinsurance in risk spreading and how the pricing, stability and capacity of reinsurance can influence the viability of one's own direct insurance purchases can be a critical and potentially costly misjudgment.

Reinsurance plays a fundamental role in providing the capital many insurers need to back their contractual obligations to policyholders and is often the most critical source of liquidity to many insurers, particularly after a catastrophe. Thus, reinsurance is essential to the financial viability of the insurer and its ability to pay losses in a timely manner.

More prosaic, but of keen interest to any buyer of insurance, is the influence of the ebb and flow of reinsurance market conditions on the environment that insureds will face in their upcoming renewals. Reinsurance, in fact, can be a leading indicator. Reinsurance underwriting decisions ripple through the system directly to the insured in fairly short order.

Where the reinsurance market is now is where the insurance market will soon be headed in terms of price as well as with respect to the quality of policy terms and conditions. One need look no further than what transpired in reinsurance renewals over the previous six to 12 months to anticipate a direct insurer's underwriting posture for the next six to 12 months.

Understanding the reinsurance market and recognizing its historic predictability, one knows that when insurance pricing and terms have hardened to the point that the pricing has become attractive to capital, new, naive (cheap) capacity will most often manifest itself first in the facultative reinsurance market. An insured can then choose either to let its direct insurer capitalize on this arbitrage opportunity at the insured's expense, or, using up-to-date market knowledge, can beat their insurer(s) to the punch and capture all of those savings themselves, through a captive or otherwise. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.