We hear about the WTC being insured against terrorism. Thus, their insurance company will have to pay. The RE insurance will then pay the insurer.
Who insures the reinsurer? What is Re insurance? Why would a company do this? Is it profitable to pay insurance companies?
Any insight at all here??
Phouchg
Lovable Rogue
From my understanding, the purpose of reinsurance is to spread the risk amongst a variety of companies, so that if a colossal event happens, all the companies can survive. It’s all in their best interest to spread out every risked dollar as thinly as possible.
Yes, it can be quite profitable to insure insurance companies.
The reinsurer collects premiums for the service, just as a primary insurer charges premiums to the direct clients.
Typically, the primary insurer will retain some of the risk, and offload the excess to reinsurer(s). The reinsurers sometimes also sell some of the risk to each other.
General Re, a large reinsurer owned by Berkshire Hathaway, estimates that it will bear 3-5% of the total claims from the Trade Center terrorism. How will they pay? Well, they’ve been getting premiums all these years and investing those premiums. So they have a big stock and (mostly) bond portfolio.
Imagine your local insurance agent is like your local bookie. The risk gets laid off and laid off and swapped and bundled until it gets to Las Vegas. That is the reinsurance market.
Simplified example.
Say we are an insurance company, we have 10,000 policy-holders who paid $500 each for life insurance this year (that’s easiest to work with, property/casualty and multiple years have more wrinkles to 'em
So we have collected $5,000,000 in premium. Every time one of our insured policyholders dies, we pay out $100,000. We expect perhaps 20 deaths in a year, so we expect to pay out $2,000,000. If we have bad luck and get 25 deaths in that year, we’re still OK, we can afford to pay out $2,500,000. But there is a very small but still real unlucky chance that there would be 50 claims or more. In that case, we’re in trouble, we haven’t collected enough money to cover the losses.
So… We go to a reinsurance company. We figure that we can afford claims under $3,000,000 (say), so we insure ourselves (so to speak) against claims being higher than that. This “insurance on insurance” is called “reinsurance.” The chance of such event occurring is small, so the premiums are relatively small, but this protects our company against losses that we can’t afford.
The reinsurance company is collecting similar premiums from many, many insurance companies. During normal years, the reinsurance company does not ever have to make pay-outs. But in a year of some catastrophic claims, the resinurance company is on the hook.
Since the claims payouts are usually large (that’s why the insurance company wants to reinsure the loss), many reinsurance companies will often pool their risks together, through some sort of sharing arrangement.
That help?