How the Reinsurance Industry benefits the economy
We're all familiar with insurance and how it benefits the economy, but how about Reinsurance?
An industry very few have heard of, the reinsurance industry plays a major economic role especially when it comes to financially covering liabilities like big natural catastrophes (Hurricane Katrina for example). Providing economic stability through spreading risk for these liabilities and also stimulating economic growth through its constant investments in various fields.
If you're unfamiliar as to what reinsurance is or how it works feel free to read my recent article Reinsurance Industry 101:
https://steemit.com/finance/@yuiop7/reinsurance-industry-101
Insurance in itself is already one of the most positive industries in the market to promote economic growth making businesses safer, providing recovery, making day to day business transactions easier, and seeking to protect our best interests backing it with policies. These policies and claims alone stimulate the economy considering the industry in itself distributes roughly 300 billion yearly through policy benefits from premiums and claims.
So where does Reinsurance play a role in this already enormous market?
Primarily Reinsurance boosts Insurance business by enabling insurance companies to accept insuring the total amount of a particular risk it underwrites given it will be later distributed among other companies. If it weren’t for Reinsurance, the insurer may not be willing to take up certain risks limiting & making it more difficult for other companies to insure their capital and making it more difficult for companies to expand and grow. This issue may be due to an insurer not having enough capital to back the liability or simply because insuring certain fields may involve to much risk, this means that a likely future claim has a high probability of exceeding the premium paid. Even may complicate the business due to the risk exceeding the company’s capacity to manage. Now a days there are even brokers in the market to support this problem offering an intangible management service.
Reinsurance also limits liabilities because the market in itself stimulates insurers to undertake and spread the risks. Hence the liability of insurer is limited to the maximum pre established.
Reinsurance Stabilizes premium Rates of insurance. Generally, the premium rates are calculated based on the loss experienced by the insurer in the past, for the risk concerned. Reinsurance takes into account of all this data from various companies and other databases to fix a premium rate according to various types of risks under mutual agreement. This benefit reflects directly into the economy in which the insurer operates, thus reinsurance stabilizes the fluctuations in the premium rates of various types of risks. The protection Reinsurance offers to insurers shouldn’t be overlooked. The insurance funds of a insurer are well protected due to reinsurance having the capability of spreading the risk of an insurers portfolio. Additional security and peace of mind is an added advantage of reinsurance for the insured and the company that offers the insurance.
Reinsurance also helps reduce competition. Inter company competition is reduced drastically as companies work in a cooperative manner and with a helping tendency in the insurance business. This later translates to reduced and healthy competition and also increases overall morale of the employees in the insurance business given their constant interaction and interdependency.
From a financial standpoint reinsurances reduces to a considerable extent the violent fluctuations in the profits of a company. Keep in mind that having heavy risks in a portfolio that are retained by the original insurer, without reinsurance their profits are still exposed & can be greatly affected due to a heavy single liability claim.
The positive benefits of reinsurance also include encouraging new underwriters, who on the other hand in their early period of development-growth have limited retentive capacity. In the absence of Reinsurance this kind of present growth for new enterprises is doubtful making way to a monopolist or oligopolistic industry.
Due to the reinsurance business model, the insurer is required to indulge in minimal amounts of dealings, usually with only one insurer. In the absence of reinsurance, the insured will have to approach several insurers to enter into various individual insurance agreements for the same property. This involves considerable costs, a loss of valuable time and slows down the pace of protection cover.
These benefits are all directly correlated to this enormous industry and in the ripple effect benefit the economy in which it operates.
Most information I gathered from work experience along with bibliography from Swiss Re manuals I own.
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