Reinsurance: An added layer of protection for insurance companies

Reinsurance is a mechanism used in the insurance sector where an insurance company (the ceding company) transfers all or part of the risk it has assumed under its policies to another entity (the reinsurer) in exchange for a premium. The two parties enter into a reinsurance agreement that outlines the terms and conditions of the transfer of risk.

This process helps the original company (the insurer) manage the financial impact of large claims, as it can rely on the reinsurer’s support in the event of a loss. In some cases, when the risk is particularly high, the reinsurer may further transfer part of the risk to other reinsurers, a process known as retrocession.

It’s important to note that purchasing reinsurance does not affect the terms of the policy the insurer has with its customers. If a claim is made, the insurance company will handle the payout to the customer and later seek reimbursement from the reinsurer according to the terms of the signed agreement.

The primary purpose of reinsurance is to help insurance companies more effectively manage the risks associated with the coverage they provide by reducing their exposure and protecting their financial assets.

Reinsurance plays a vital role in adding an extra layer of security and financial stability, ensuring that even in the event of unforeseen catastrophic events, insurers can still meet their obligations to policyholders with greater ease, backed by the strength and reliability of the reinsurance market.

Beyond ensuring solvency, reinsurance enables the ceding company to offer more competitive insurance terms and broader coverage options.

Reinsurance contracts are typically divided into two main categories: facultative reinsurance (where reinsurance is negotiated for a specific policy) and reinsurance treaties (which cover all policies within a particular line of business). Another classification differentiates between proportional reinsurance—where both the insurer and the reinsurer share the risk and premium of the policy proportionally—and non-proportional reinsurance—where the reinsurer’s responsibility begins after a certain financial threshold, with the insurer covering any amount up to that limit. There are also other classifications and numerous subcategories, which are best left to professionals.

In some cases, when the risk is particularly high, a reinsurance pool may be established—an agreement among multiple reinsurers, often seen in high-risk sectors such as nuclear or environmental risks.

Reinsurance is not the only method insurance companies use to mitigate risk. Another option is coinsurance, which we will explain in more detail later. While both serve similar purposes, they are different. 

In coinsurance, multiple insurers share the risk coverage and are directly responsible to the insured based on their share of the risk.

Current trends in the reinsurance industry highlight the increasing importance of technology and digital solutions. There is also significant growth in cross-border operations.

Founded in 1982, MAPFRE RE is the reinsurance unit of the MAPFRE Group. With 18 offices around the world, it maintains business relationships in over 100 countries. MAPFRE RE is known for its customer loyalty and its commitment to building long-term relationships based on trust and cooperation.

More than 1,400 ceding companies, or insurers, rely on MAPFRE RE, which ranks as the 16th largest reinsurer globally by premium volume, according to the latest Standard & Poor’s ranking. In 2023, MAPFRE’s reinsurance business grew by 7.8%, exceeding €6.1 billion.

RELATED ARTICLES: