The reinsurance market is full of jargon, acronyms, and industry norms. Understanding these concepts is a key part of succeeding in this niche field. Many companies enter the world of reinsurance, but only a select few remain when the dust settles. The good news: If you’re willing to put in the work, becoming an elite rein underwriter is not that difficult. Here are some of the most important reinsurance concepts you need to understand if you want to succeed in this industry.
Actuarial Reinsurance
Every company in the reinsurance industry offers some form of insurance. Even a very small property and casualty (P&C) insurer will offer some form of coverage. It’s the “actuarial” aspect of reinsurance that makes it different. Every insurer deals in “actuarial risk.” The difference is that reinsurers are experts at calculating the likelihood of certain types of risks and how much they’re going to cost to cover. When reinsurers talk about “actuarial risk,” they’re talking about the likelihood that a certain type of loss will happen to a certain type of insured. For example, most property and casualty insurers calculate the actuarial risk of disaster losses. The likelihood of a disaster is high, and the cost of a catastrophe is high, so an insurer will charge a high rate to compensate for this risk. Reinsurers, on the other hand, deal in something referred to as “actuarial loss.” This is the type of loss that will hypothetically happen to a certain type of insured. If a hurricane destroys a manufacturing plant, the loss will be determined by the amount of the insured property, the amount of uninsured property, the amount of replacement cost, and the nature of the insured loss (e.g., raw materials vs. finished goods, etc.).
Risk-Based Reinsurance
Most companies in the reinsurance industry offer two types of reinsurance: facultative and mandatory. “Facultative” means the reinsurance is optional for the insured, and “mandatory” means the reinsurance is required for the protection of the insured property and people. Many companies offer facultative reinsurance. Ideally, the company can simply sit back and watch to see if a loss actually happens. If it does, the reinsurance company takes the loss, and the policy holder pays the reinsurance company a percentage of the loss amount. This is the way of the world in earthquake-prone areas. In these regions, the likelihood of a significant earthquake is high, and the cost of a catastrophe is very high, so companies will charge a high rate for earthquake coverage. But other regions are much less likely to experience a disaster of this magnitude. If a company offers earthquake coverage in Arizona, where earthquakes are very rare, it can charge a much lower rate for the risk. Risk-based reinsurance is a very common type of reinsurance. It’s also the type of reinsurance most people are familiar with. The main reason this is important is that it explains how most companies in the reinsurance industry function.
Core Reinsurance
Many companies in the reinsurance industry will offer additional reinsurance that’s referred to as “core reinsurance.” This type of reinsurance is generally one type of risk (for example, fire) that covers a wide range of losses that could potentially happen (for example, a fire at a supermarket could cause a large amount of damage to various types of property, or food contamination could make people sick). All companies in the reinsurance industry offer some form of “core” coverage. Very high-risk industries, such as an oil refinery, will almost always offer “core” coverage. Lower-risk industries may offer “core” coverage, but it will be much less expensive than “core” coverage in high-risk industries. One main reason this is important is that it explains how the reinsurance industry works. Core reinsurance is a form of facultative reinsurance, so it’s not as expensive as other forms of reinsurance.
Specialty Reinsurance
Many companies in the reinsurance industry offer “specialty reinsurance.” This type of reinsurance is almost always a large-claims form of coverage. If a large loss occurs, this coverage could potentially pay out a large amount of money. While it is possible to offer large-claims coverage as a voluntary form of reinsurance, most companies in the industry offer this coverage as a mandatory form of reinsurance. If a large loss occurs, the reinsurance company may be legally required to pay out a large amount of money. In many industries, particularly aviation, this is a requirement. The insurance company may have to pay a large amount of money to the policy holder if a major disaster happens.
Co-Reinsurance
Most companies in the reinsurance industry offer “co-reinsurance.” This type of reinsurance is a type of excess. In some cases, the insured will pay a certain amount of money up front and then the reinsurance company will pay a certain amount of money if the loss is greater than the amount that was paid up front. In other cases, the policy holder will pay a certain amount of money “up front,” and the reinsurance company will pay a certain amount of money “if the loss is greater than the amount paid up front.” Either way, the policy holder is protected in the event of a large loss. The primary benefit of “co-reinsurance” is that it allows an insurance company to offer a lower rate for a certain type of coverage.
The reinsurance market is full of jargon, acronyms, and industry norms. Understanding these concepts is a key part of succeeding in this niche field. Many companies enter the world of reinsurance, but only a select few remain when the dust settles. The good news: If you’re willing to put in the work, becoming an elite rein underwriter is not that difficult. Here are some of the most important reinsurance concepts you need to understand if you want to succeed in this industry.
