In law, an insurer must have sufficient capital to ensure that it is able to pay any potential future claims related to the policies it issues. This requirement protects consumers, but limits the business expenses that an insurer can cover. However, if the insurer can reduce its liability for these claims by transferring some of the liability to another insurer, it can reduce the amount of capital it must maintain to convince regulators that it is in good financial health and that it will be able to pay its policyholders` claims. Becoming free in this way can support more or more large insurance companies. The company that initially issues the policy is called the primary insurer. The company that assumes responsibility for the primary insurer is called a reinsurer. Major companies must „sell“ business to a reinsurer. Catastrophe bonds and other alternative risk financing instruments: The shortage and high cost of traditional catastrophe reinsurance triggered by Hurricane Andrew and falling interest rates that led investors to seek higher returns led to interest in securitizing insurance risks. Precursors to what is known as true securitization included emergency financing bonds, such as those issued to the Florida Windstorm Association in 1996, which provided liquidity in the event of a disaster but had to be repaid after a loss, and conditional excess bonds — an agreement with a bank or other lender that would significantly reduce policyholders` surplus in the event of a megacatastrophy.
The funds would be made available at a predetermined price. The funds to pay for the transaction, if money is needed, are held in U.S. Treasuries. Excess debt securities are not considered debts and therefore do not impede an insurer`s ability to take out additional insurance. Added to this were equity investments, where an insurer would receive a sum of money in exchange for shares or other options in the event of catastrophic damages. In the case of pro-rated reinsurance, the reinsurer receives a proportionate share of all policy premiums sold by the transferring company. At the time of the claim, the reinsurer covers part of the losses on the basis of a pre-negotiated percentage. The reinsurer also reimburses the cedor for the processing, acquisition and writing costs.
Assigned reinsurance refers to the portion of the risk that a primary insurer transfers to a reinsurer. It allows the main insurer to reduce its risk compared to an insurance policy it has taken out by transferring this risk to another company. Primary insurers are also called cedors, while the reinsurance company is also called the beneficiary company. In return for taking over the risk, the reinsurance company receives a premium and pays the claim for the risk it assumes. Many reinsurance investments are not placed with a single reinsurer, but are spread across multiple reinsurers. For example, a surplus of $30,000,000 and $20,000,000 can be shared by 30 or more reinsurers. The reinsurer who determines the terms (premium and contractual terms) of the reinsurance contract is called the lead reinsurer; the other undertakings concluding the contract shall be referred to as the following reinsurers. Alternatively, a reinsurer can take over the entire reinsurance and then transfer it to other companies (pass it on in another reinsurance contract).
A clause in a reinsurance contract which provides for the estimation, payment and full performance of all obligations, including future obligations between the parties for reinsurance losses incurred […].