The Difference Between Insurance and Reinsurance
Insurance is about protection. It allows individuals and businesses to transfer financial risk of unforeseen events to a third party, usually an insurance company. These events can include a wide range of perils such as accidents, illnesses, natural disasters or property damage. In exchange for regular premium payments, an insurer promises to cover losses according to the terms of a contract (the insurance policy).
However, there may come a time when an insurance company may wish to minimize their risk of a certain type policy or book of business. In these cases, an insurer can look to purchase reinsurance which is a specialized type of insurance available to insurance companies.
This article will explore the differences between insurance and reinsurance in more detail.
The emergence of reinsurance
The nature of insurance such as property is such that insurers can be vulnerable to widespread, catastrophic losses that could cripple or bankrupt their businesses. For example, a fire destroying an entire town, or a massive natural disaster could overwhelm even the largest insurers.
To help address this problem, companies began to share the risks they had assumed with other insurers. This concept evolved into what we now call reinsurance.
The first reinsurance contract on record appears to have been entered into in or around 1370, when an underwriter contracted with another to reinsure a ship on part of the voyage from Genoa to the harbor of Bruges. The first dedicated reinsurance company was established in Cologne, Germany, in 1846: Cologne Re (now part of General Re).
Today, reinsurance is a cornerstone of the global financial landscape, providing a crucial backstop for primary insurers and supporting stability across industries.
Insurance vs reinsurance: What is the difference?
While insurance and reinsurance operate on similar principles, they serve different participants and purposes.
Assurance is a contract between an individual or business (the insured) and an insurance company (the insurer). The insurer agrees to pay for certain defined losses in exchange for premiums.
Reinsurance is a contract between an insurance company (the cedent) and another insurance company (the réassureur). The reinsurer agrees to accept some of the risk from the cedent, in exchange for part of the premium.
An insurance company can only write policies that they have sufficient capital to cover. If an insurance company wishes to expand their book of business, at some point they may not have enough capital to be able to continue writing policies. Reinsurance can be purchased to make up for the deficit in capital and manage their risk by transferring portions of their policies to another insurance company, insulating itself against the risk of a major claims event.
Partnering with an conseiller en actuariat can help insurers model these risks and choose the most appropriate insurance or reinsurance arrangements.
Reinsurance explained: treaty vs facultative reinsurance
Reinsurance can be structured in two main ways: treaty reinsurance and facultative reinsurance.
Both methods allow insurers to manage their risk exposure, but they work differently.
La réassurance conventionnelle
La réassurance conventionnelle is an agreement where a reinsurer agrees to cover a specified portion of certain policies written by the insurer. The reinsurance company is not involved in the underwriting of individual policies. Rather the ceding company does all of this under the agreement made with the reinsurance company. The name of this agreement is a ‘treaty’ which is where this type of reinsurance gets its name. The reinsurance company will typically have a close relationship to the ceding company because they will trust the company to issue policies and write business based on the terms of their agreement.
Cette entente pour de futures polices sera détaillée entre les deux compagnies et inclura les classes de risque que la compagnie cédante peut accepter, ainsi que les capitaux que la compagnie de réassurance va fournir/couvrir.
The arrangement applies to all policies that fit within the agreed-upon parameters. There is no need to negotiate each policy individually.
Facultative reinsurance
La réassurance facultative peut être vue comme de la réassurance plus spécifique, où la compagnie qui se la procure (la cédante) achète de la réassurance seulement pour certains actifs spécifiques. Par exemple, la cédante pourrait être approchée pour assurer un centre d’affaires pour 10 millions $, mais n’a peut-être pas 10 millions $ en capitaux disponibles pour émettre cette police. La cédante approcherait alors les compagnies de réassurance, leur demandant de couvrir la partie de l’assurance du centre d’affaires qu’elle ne peut pas couvrir. Si elle a assez de capitaux pour couvrir 7 millions $, elle rechercherait une réassurance de 3 millions $.
La réassurance facultative est habituellement utilisée pour des polices à valeur ou à risque élevé. Les actifs à risque ou à valeur particulièrement élevés pourraient ultimement exiger que la cédante magasine un peu avant de trouver une compagnie qui voudra émettre une réassurance.
During the underwriting process of a facultative policy, the reinsurance company may also specify under which conditions they will pay, leaving most of the risk with insuring the asset in the hands of the ceding company. Of course, this is not always the case and facultative insurance varies largely based on the company that issues it and the asset(s) which are covered. In many cases, insurance companies use a combination of treaty and facultative reinsurance to build a resilient risk management strategy.
Looking for the most appropriate insurance or reinsurance option for your organization?
Whether you’re a small business owner seeking protection against everyday liabilities or an insurance provider needing to manage your exposure to catastrophic risks, choosing the right insurance or reinsurance solution is critical.
When evaluating your options, you’ll need to consider the following:
- Risk profile: What are the most significant risks your organization faces?
- Coverage needs: Are you looking for broad, ongoing protection (treaty) or specific, one-off support (facultative)?
- Your partners: Are your insurance partners financially secure and reputable?
- Cost: Are premiums or reinsurance cessions priced competitively?
Working with experienced insurance brokers and risk consultants can help you navigate this complex landscape and build a protection strategy tailored to your needs.
Being properly insured, and knowing when to layer that protection with reinsurance, can be the difference between thriving through adversity and experiencing the worst.
At Axxima our experienced professionals are committed to providing tailored solutions with the highest level of care and expertise.
We invite you to contact us today to discuss how we can support your risk management needs with confidence and security.
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