How reinsurance keeps insurers afloat in a catastrophe

How reinsurance keeps insurers afloat in a catastrophe

Following a major catastrophe, such as a natural disaster, an act of terrorism or something else, an insurer will then need to pay out for the resulting insured damages, all of which can amount to millions of pounds. To mitigate this risk, insurers participate in a practice called reinsurance.

What is reinsurance? 
To reduce the chances of an insurer needing to pay out a debilitating sum of money in the event of a catastrophe, many limit their loss by sharing the risk with other insurers. They do this by selling their own insurance policies to other insurers who take on some of the financial burdens of these clients; this process is called ‘ceding’. The company which takes on the policies then takes on the role of the reinsurer.

Are there different types of reinsurance?  
Reinsurance tends to be measured by an individual risk, an event or a portfolio of risks. The most common method of reinsurance is ‘Treaty Reinsurance’ in which both insurer and reinsurer agree to the terms of a treaty and the reinsurer accept all risks under the treaty’s terms. A less popular method is ‘Facultative Reinsurance’ in which the insurer submits the risk to the reinsurer and if they agree, the coverage is written, and a contract created for that specific risk.

How does the reinsurer benefit from this?  
When a policy is reinsured, the insurer will agree to pay a proportion of the premium paid by the customer to the reinsurer. Reinsurers then have the responsibility to handle the risk they’ve taken on to remain solvent following an inevitable major event. 

Does this affect your insurance policy?
Reinsurance is a common practice and most insurers have reinsurance programmes to mitigate their own risks. Customers shouldn’t worry about this negatively affecting their premiums or any claims they need to make. If your policy has been reinsured, you most likely won’t even be aware of this and you can go about making a claim with your insurer as normal. Your insurer will then be able to claim back from the reinsurer after your claim has been dealt with.

How does it benefit policyholders? 
Far from being a detriment to policyholders, reinsurance actually opens up the possibility for people who have found it difficult to get insured. It enables insurers to cover for risks that would be too great a burden for them to handle alone, meaning they can provide a greater scope of protection at more competitive premiums.

If you’ve found it difficult to find cover for a high-risk area in the past, at Weir we might be able to help. Call our specialist team on 0800 281 453 for a no-obligation chat.