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8/18/2014 2014 Spring Issue

https://www.soa.org /News-and-Publications/Newsletters/The-Future-Actuary/2014/spring /Reinsurance-Demystified.aspx

REINSURANCE DEMYSTIFIED

By Sam Doan

Natural catastrophes are an unavoidable element in the world. Reinsurer Swiss Re reported that in the year 2013,

insurers paid $45 billion in global catastrophe claims . While this figure was 44 percent less than the amount paid in

2012, it still has a s ignificant impact on insurers. It is safe to say that insurers would have entered the realm of

bankruptcy when faced with the aftermath of catastrophes like Hurricane Sandy, if it wasnt for their best friend,

reinsurance. When the question What is reinsurance? is asked, the following answer comes to mind: Reinsuranceis insurance for insurance companies.

Dedicated reinsurers s uch as Swiss Re and Munich Re emerged in the 19th Century and it was evident that these

companies were ess ential for insurance operations and development. Since then, reinsurance has continued to play a

major role in transferring part of the hazards and risks that direct insurers face from their issued policies onto a

secondary party (the reinsurer). The importance of reinsurance to the insurance industry is undeniable. What is of great

interest is how much reinsurance is necessary for a company, the enhancements that reinsurers offer and the risks

that reinsurers mus t take on as a result.

While reinsurance is indeed a necess ity, it is natural to think about just how much of it is necessary for a typical

insurance company. It should not be a surprise that the amount of reinsurance required is linked to the companys

characteristics. Factors s uch as readiness to face risk, financial s trength and m arket practice all play a role. That being

said, reinsurance is not a shield agains t bankruptcy, but rather, an entity which is able to lower the chances of a

company ending up in shambles.

In many ways, reinsurers are able to enhance the value of services offered by the primary insurer to their clients. As

stated above, the reinsurer is able to reduce the probability of an insurers ruin by taking on their catastrophic risks. In

addition to this, reinsurers are able to assis t in maintaining an insurers s tability with respect to theirbalance sheets by

taking on part of the risks of fluctuation, change and error. Reinsurance companies are also able to provide balance in

an insurers portfolio by covering the parts of the portfolio that are highly exposed to risk. By doing thi s, the reinsurer

frees up some space in the insurers capital which allows them to use their resources in another area besides risk

management.

When evaluating the relationship between a reinsurer and insurer, it is clear that there are many consequences which

the reinsurer mus t face by entering into an agreement. As m entioned before, reinsurers are respons ible for handling

their clients highly exposed risks, catastrophic risks and other types of scenarios with high severity. While meeting this

criteria, the reinsurer must maintain its own portfolio in order to make a profit and s tay in bus iness. Many reinsurers

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8/10/2019 2014 Spring Issue_CAS_future Actuary

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8/18/2014 2014 Spring Issue

https://www.soa.org /News-and-Publications/Newsletters/The-Future-Actuary/2014/spring /Reinsurance-Demystified.aspx

such as Swiss Re and Munich Re strive for balance in their portfolios by distributing their services all over the globe.

It is safe to say that as long as insurance exists, so will reinsurance. In a world where catastrophes are just around the

corner, insurance companies need security when performing their day to day business , and it is up to reinsurers to

answer the call.

Sam Doan is currently a fourth year student at the University of Toronto. Sam can be reached at

doansam@gmail.com.

mailto:doansam@gmail.com