The Role of Reinsurance Industry

Topics: Reinsurance, Insurance, Actuarial science Pages: 10 (3279 words) Published: December 13, 2012
Describe the role of the reinsurance industry. Give examples from recent events of the importance of the sector.

Jack Nolan (09006300)

1. Introduction:
What is reinsurance? Why do insurance companies go through the process of insuring policies before transferring them to other entities? Reinsurance is a method which involves insurers insuring their own respective risks with reinsurance firms. Firstly, an important function of reinsurance is to ensure that the insurance operations of company’s doesn’t eventually lead to detrimental financial losses. ‘Catastrophes, unexpected liabilities, and a series of large losses that might be too great for an individual insurer to absorb can be handled through reinsurance’(McIsaac and Babbel 1995).Secondly, reinsurance is a method which allows an insurance company or underwriter the option of allocating part of their liability to a reinsurer based on their acceptance. Billions are spent each year around the globe on reinsurance policies to ensure stability throughout the insurance marketplace. Similar to the operations of people and businesses insuring their own personal risk, insurance companies use reinsurance to transfer their respective risks. The first real signs of the reinsurance market was back in 1370, when an underwriter named Guilano Grillo contracted with Goffredo Bonaira and Martino Sacco to reinsure a ship on part of the voyage from Genoa to the harbour of Bruges (Kopf 1929). Since this quote, there have been unprecedented developments in the Reinsurance market. Nowadays, ‘’Reinsurance is a global business, covering risks from insurers in many geographic locations (Holzheu and Lechner 2007). There are many major international players within this particular volatile sector. Munich Reinsurance Company, Swiss Re Company Limited and Lloyd’s were ranked in the top five reinsurers based on gross premiums written for 2011 (Mcmahon 2012). There has been a major emphasis placed on the reinsurance industry in recent years due to the sudden surge in catastrophic events occurring around the globe. The latest disaster being ‘Hurricane Sandy’ causing devastation along the east coast of America, hitting major cities including New York and New Jersey. The aim of this dissertation is to give a detailed and in depth analysis of the current global reinsurance market. I will give an insight into the clear importance and need for this sector with catastrophes happening worldwide on a regular basis, having detrimental effects. Furthermore, there will be a focus on the complexity of terrorism risk in relation to reinsurance, whilst highlighting how volatile this sector can be.

2. Role of the reinsurance industry:
Reinsurance is a financial transaction where a fee is exchanged between an insurance company and a reinsurance company for the transfer of risk. Within this agreement the insurance company is referred to as the ‘ceding company’ or ‘cedant’ whilst the reinsurance company is known as the reinsurer. Reinsurance offers a method of risk management for insurance companies who operate in a volatile market where they may not have the financial capabilities to pay back claims upon the occurrence of catastrophic events. After an agreement has been agreed between the both parties, it will be the duty of the reinsurer to pay a share of future claims incurred by the ceding company. Unlike reinsurance another method of risk management is coinsurance, both possessing differences in relation to contractual relationships. Reinsurance involves passing a proportion of the risk to the reinsurer, whilst coinsurance involves sharing and transferring the risk between various insurance companies. The two most common types of reinsurance include facultative and treaty. Firstly, under the facultative method each risk is considered separately and that each facultative reinsurance forms a complete reinsurance contract in itself (Golding 1987). Facultative reinsurance is mainly purchased by...
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