Term
Reinsurance
Insurance for insurers, in which an insurer passes part of the risk from its policies to a reinsurer. It allows large risks such as factories or natural disasters to be covered without threatening the insurer's own stability.
Updated
What it means
Reinsurance is insurance for insurers, in which an insurance company passes part of the risk from its insurance contracts to a reinsurer. The insurer can thus cover large risks, such as factories, major construction projects or natural disasters, without threatening its own financial stability.
There is proportional reinsurance, where premiums and losses are shared between insurer and reinsurer in an agreed ratio, and non-proportional reinsurance, where the reinsurer pays only losses above a certain amount. Reinsurance can cover a whole portfolio or individual large risks.
Reinsurers operate mainly on the international market and spread risks worldwide. Insurers and reinsurers are regulated, and in the EU they follow rules on capital requirements and risk management. In Slovakia supervision is carried out by the National Bank of Slovakia.
How it works in practice
An ordinary company does not deal with reinsurance directly, since it contracts only with its own insurer. Reinsurance does, however, affect the availability and price of cover. When reinsurance markets harden after major disasters, insurers raise prices or narrow the scope of property insurance.
For large industrial risks, such as insuring a manufacturing plant and business interruption, the insurer often requires detailed risk information, a site survey and loss prevention measures. Some of these requirements come from reinsurers.
Large groups sometimes set up their own insurers, known as captives, which insure group risks and reinsure part of them on the market. Such structures are complex and require careful assessment of their regulatory and tax consequences.
What to watch out for
When a large insured event is settled, the reinsurer may also become involved, which can lengthen the process. The policyholder should have full documentation of the loss and communicate with the insurer promptly and accurately.
When choosing an insurer for large risks, it is worth asking about its financial strength and the quality of its reinsurance. An insurer with weak reinsurance may struggle to pay a large claim, so for significant risks it pays to work with an independent broker.
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