19 August 2020

Reinsurance is often described as insurance for insurance companies and in the first half of 2020, some of the major global reinsurers have announced significant losses, comprised of underwriting losses and losses relating to their investment income.

Lloyd’s of London estimates potential losses from COVID-19 could exceed US$200 billion. Coming off the back of other global events such as the Australian bushfires and weather storms, 2020 is shaping up to be one of the most expensive insurance loss years ever.

What is reinsurance?

Reinsurance is the practice used by insurance companies to protect themselves against the financial impacts of a significant claim event, or the accumulation of a series of events, by ceding or transferring some of their portfolio risk to other insurers, the reinsurers.

Without the ability to lay off some the financial impacts of catastrophes, insurers’ premium reserves would be quickly eroded, and they would not be able to meet their obligations to pay the claims of their policyholders.

Types of reinsurance include:

• Treaty reinsurance

Treaty reinsurance refers to the insurer transferring its entire portfolio of certain classes of insurance to the reinsurer. Within acceptable criteria, the reinsurer is obliged to accept all covered business.

• Facultative reinsurance

Facultative reinsurance is used for individual or very specific risk transfer, where the risk in question falls outside of the Treaty arrangements – it could be a type or size of property which is particularly hazardous and considered high risk. In these situations, the reinsurer fully underwrites the risk to decide what proportion of the risk they will take and what premium they will require.

How does this affect your policy?

All reinsurance arrangements involve the consideration of the holding insurer paying a premium to the reinsurer. When reinsurance capital is eroded due to major events, reinsurance costs can increase which impact insurers’ costs in running their business and ultimately the policyholders’ premiums. This is why significant global insurance events have a bearing on even our domestic insurance premiums.

With access to a comprehensive list of local and international insurers, our brokers can build an insurance program that fits your requirements in all areas, including level of cover, quality of cover and price. Get in touch with the General Insurance team at Findex today.

Disclaimer:

Findex Advice Services NZ Limited, trading as Findex

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August 2020