C3 - A Flashcards
What is reinsurance?
Reinsurance is insurance purchased by insurers to transfer some of their risk to other insurers (reinsurers). It is often called ‘insurance of insurance’.
Why do insurers buy reinsurance?
Insurers buy reinsurance for several reasons: risk transfer, peace of mind, balancing out peaks and troughs, and releasing capacity.
What is risk transfer in reinsurance?
Risk transfer involves transferring the risk of large claims from the insurer to the reinsurer to reduce exposure to losses.
How does reinsurance provide peace of mind?
Reinsurance protects insurers against catastrophic losses that could financially damage their business.
What does balancing out peaks and troughs mean?
It refers to managing the volatility in profitability across different classes of business that insurers underwrite.
What is capacity in insurance?
Capacity is the limit on the amount of business an insurer can underwrite in a year, often measured by premium income.
How does reinsurance help release capacity?
By transferring some risk to reinsurers, insurers can free up capacity to take on more risks.
Why do firms sell reinsurance?
Firms sell reinsurance to access business not otherwise available, trial new classes of business, and due to pure business preference.
How can reinsurance help access business not otherwise available?
Regulators may allow local insurers to write reinsurance but not direct business, enabling access to international markets.
What is a safer way to trial a new class of business?
Writing reinsurance for another insurer allows firms to explore new business without heavy capital investment in underwriters.
What is an example of a company that prefers reinsurance?
Companies like Swiss Re and Munich Re primarily focus on reinsurance rather than direct business.
