What is Reinsurance and What Are Its Advantages?

During an emergency our first thought goes to the insurance policy we have as we know that it will be our backup and relieve any financial burdens we may face, but have you ever wondered about the process behind the insurance policy?

How does an insurance company insure – no pun intended- itself against any emergencies of its own? One of the methods used by insurance companies worldwide is “reinsurance”

Find out more about insurance in Egypt: What is The Insurance System in Egypt?

Reinsurance: A (very) brief history

The beginning of the reinsurance system can be traced back to the 19^th century when the term came into being with the establishment of the first reinsurance company in Germany in 1846. The purpose of which was to stabilize the economy which was in crisis. At first reinsurance was limited to offering coverage for local assets only. When fire incidents increased all across Europe in the late 19^th century more reinsurance companies emerged in order to meet the high demand.

Insurance companies apply the law of large numbers to avoid major losses. They would rather avoid covering a possible large loss in exchange for covering a small sure loss.

What is reinsurance?

Reinsurance is when an insurance company wants to minimize a risk by “sharing” it with another insurance company (or more than one insurance company), you could say it is an insurance for an insurance company.

When a client “the insured” buys a policy from an insurance company “the insurer” and if the policy is for a large claim and against hazards that are more than likely to occur the insurance company would sometimes purchase insurance of its own from another insurance company in exchange of a percentage of the premium paid by the insured. This way it insulates itself against the risk of a sure major claim.

The insured has absolutely no contact with the second insurance company. In case the policy terms are activated the original insurer is liable.

Advantages of reinsurance:

• Allows the insurance company to approve more insurance policies against sure hazards and for larger claims.
• Reinsurance stabilizes the loss rate and provides security during financially stressful times for the insurance company.
• Insurance companies apply the law of large numbers to avoid major losses. They would rather avoid covering a possible large loss in exchange for covering a small sure loss.
• Helps insurance companies study the local market and its needs which allows insurance companies to make sound decisions when entering a new region and also helps them decide which existing insurance companies to cooperate with.