reinsurance
Insurance Dictionary -> reinsurance
Insurance covers individuals and businesses against various losses associated with damage or personal injury, but where do insurance companies go to get their own insurance? After all they still have property that can get damaged, a business that can make losses and a workforce that might become ill. In fact an insurance company has other people’s polices to look after, so what happens if they go under? This is where Re-Insurance comes in. It’s basically the term given when an insurance company approaches another company for insurance. Although it seems like a strange concept, the process and risk assessment is treated no differently to any other type of insurance, although the insurer obviously knows the company’s risks inside out.
Beyond the regular types of insurance that all businesses take out, it can get a little more complex. Insurance companies now often take out insurance so they can lower premiums and give higher payouts to their own customers; the logic being that they now have a stronger backup because they have their own insurance. Arbitrage often occurs where a company purchases insurance lower than what they charge their own customers, allowing them to continually expand.
In some reinsurance agreements a company may pass on some of their risk portfolios to another company, sharing the risk and some of the premium. It s a way of reducing the risk, at the cost of losing some of the profit.