Reinsurance for the Insurance Company - their role in your insurance policy.

Reinsurance is a risk management tool used by insurance companies to mitigate their exposure to significant financial losses. It involves transferring part of the risk associated with insurance policies to another entity, the reinsurer. By doing so, the insurance company reduces the likelihood of insolvency in the event of catastrophic claims and gains greater financial stability.

Here’s how it works: When an insurance company underwrites a policy, it assumes liability for the risk covered. However, certain risks—such as natural disasters, pandemics, or large industrial losses—can result in claims that exceed the insurer's capacity to pay. To manage this, insurers purchase reinsurance contracts, allowing them to share the risk.

Reinsurance can be structured in several ways, the most common being proportional and non-proportional agreements. In a proportional reinsurance agreement, the reinsurer agrees to share a percentage of both the premiums collected and the claims paid. For example, if an insurer and reinsurer agree on a 50-50 split, they share premiums and losses equally. In contrast, non-proportional reinsurance, such as excess-of-loss coverage, kicks in only when claims surpass a certain threshold, protecting insurers from severe losses.

Reinsurance allows insurance companies to underwrite larger policies or expand their coverage portfolio without exceeding their risk appetite. It also stabilizes earnings and improves solvency margins, enhancing their ability to serve policyholders. Reinsurers, in turn, diversify their risk by working with multiple insurers across different markets and regions. This global risk-sharing mechanism ensures that even large-scale events, such as hurricanes or economic downturns, don’t cripple any single insurance entity, safeguarding the insurance ecosystem.

Jenny is a business insurance broker with Waypoint Insurance. She can be reached at 604-317-6755 or jhansen@waypoint.ca.  Please connect with me on LinkedIn at https://www.linkedin.com/in/jenny-holly-hansen-365b691b/

Jenny Holly Hansen is a cohost with Chris Sturges of the Langley Impact Networking Group. You are welcome to join us on Thursday’s from 4pm to 6pm at: Sidebar Bar and Grill: 100b - 20018 83A Avenue, Langley, BC V2Y 3R4

Jenny Holly Hansen is a cohost with Chris Sturges of the WRN News - Langley Edition

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