Who insures the insurer? The industry that built its foundation on spreading risk has developed the most advanced strategies to ensure that the risk really is covered. In so doing, the industry invented reinsurance.
The idea of reinsurance is just as it sounds—one insurance company insuring another against potential losses. The Reinsurance Association of America hosts many pages of education about reinsurance, along with training and education to help the uninitiated learn more about how reinsurance works.
Reinsurance in practice
Reinsurance can be best explained by the “all your eggs in one basket” analogy your mother used to caution you with. Reinsurance is one insurance company purchasing part of the risk held by another as a means of risk management – many eggs, many baskets.
There are times when a reinsurer is interested in purchasing only one policy, and there are times when a reinsurer covers a class or category of coverages. This is known as a “treaty”.
Here in the U.S. state regulations – which oversee the governance of insurance companies – stipulate that only 10 percent of an insurance company’s net worth can be on the line, unless the policies are in a reinsurance scheme. Reinsurance companies form a sort of community where risk is shared so that when there is a big disaster, the loss is shared by many, and no single insurer bears all of the burden.
Reinsurance and Captives
The idea of reinsurance is now hard-wired into the insurance industry in the U.S. All insurance companies must participate in a pool of risk, and captive insurance companies are no exception.
Intuitive Captive Solutions (Intuitive) operates Intuitive Reinsurance Administrators, LLC, which was formed to manage Intuitive’s proprietary reinsurance pool, the Colorado Reinsurance Exchange. The CREX is an insurance pool that is exclusive to captives under the management of Intuitive to share risk through a reinsurance contract. By spreading the risk, Intuitive captives are able to share losses and benefit from the financial support of their insurance colleagues while remaining compliant with regulatory requirements.
Listen to your mother: In life, and especially insurance, don’t put all your eggs in one basket. If you are considering starting a captive insurance company, take a very good look at the market and the various risk solutions that are available to you – the reinsurance strategy that you participate in will be critical to the long-term performance of your captive. Scrutinize the index well and make sure you understand how the Index calculates risk and makes its decisions.
If you have any questions about reinsurance or the CREX, please feel free to contact us with questions.