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Explain Like I’m 5: Reinsurance

By August 16, 2022November 22nd, 2022No Comments
Those who are elbow-deep in insurance daily throw around jargon like it’s nothing. This can leave the rest of us scratching our heads, trying to keep up or just giving up. As true business partners, we want everyone to be able to grasp insurance concepts and see how they apply to their organization. That’s why we started our “Explain Like I’m 5” series. We want to take sometimes confusing terminology and make it simple and digestible.   Today, we simplify reinsurance.   Reinsurance is simply insurance for insurance companies. While the structure of the contracts may be more diverse than a standard consumer purchasing from a standard insurance carrier, the principle is still exactly the same. In exchange for premium, the risk of financial loss is transferred to a third party.  In this case the reinsurer assumes that risk and issues a policy, and the policy holder is an insurance carrier. What this means is the insurance provider transfers some of their risk to other insurers. This helps to offset the financial burden that comes from catastrophic or multiple losses. The insurer who transfers the risk is considered the ceding party, whereas the insurer taking on that risk is considered the reinsurer. By utilizing reinsurance, ceding parties can improve their underwriting parameters when it comes to the amount and severity of risks. Ceding parties also enjoy the benefit of greater security for their equity and improved stability since the reinsurer gives them the financial cushion to remain standing when there are unusually catastrophic claims.   Specific vs. Aggregate Reinsurance   The reinsurer and cedent agree on conditions for the reinsurance. The cedent pays the reinsurer a premium and then charges premium to their own policyholders. With specific reinsurance, each individual policy is negotiated for reinsurance. This means the reinsurer takes on higher costs upfront, as their team must individually underwrite each risk, hence specific.   Alternatively, aggregate reinsurance will provide coverage against an entire population that is overrun within a calendar year.   Every insurance captive works a little differently, and this information is for educational purposes only. As licensed insurance professionals, we can provide more detail and guidance for your specific needs. Contact to get started.
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