US reinsurance offers financial protection to an insurance company against excessive losses. This type of general insurance policy helps an insurer share complete or part of the insurance risk with another insurer for a specific price. A reinsurance company can also seek to redistribute its risks among other insurance companies. This process is called retrocession.
A survey conducted by the Society of Actuaries (SOA) and published in 2008 has indicated that the US was the largest life reinsurance market in 2007. According to the study, the assumption of the recurring ordinary reinsurance policies declined by 5.7% in 2007, as compared to 30% over 2005 and 2006.
US Reinsurance: Benefits
Apart from the basic benefit of providing financial protection to an insurance company, US reinsurance policies offer:
Protection against large claims. Insurance companies might have to deal with huge and extensive claims in the event of a natural disaster. In such cases, an insurance company might go bankrupt while paying off all the claims. With the help of reinsurance, none of the insurers would have to bear high losses alone.
Prevention of unwarranted fluctuations in results. With the risks spread out among insurers, an insurance company would not have to suffer ‘peaks and troughs’ in its annual results. Reinsurance keeps a cap on the claims an insurance company is exposed to.
Spreading of risks outside a nation. This benefit is felt by insurance companies that have heavy exposure to countries vulnerable to natural disasters. Reinsurance helps these companies spread their risks with international reinsurance companies.
Increased risk-taking capacity of an insurer. By buying USA reinsurance, an insurance company can also accommodate clients who require the coverage amount to be too high for a single insurance company to handle alone.
Availability of additional capital. Writing a policy by an insurer is limited by its balance sheet. When the insurer reaches its limit, it might have to stop taking new business. The alternative is reinsurance, with the help of which the insurer can raise additional capital.
Availability of a reinsurance company's expertise: An insurance company not only shares risks but also the expertise of a reinsurance company in a specific area.
Creation of a balanced portfolio: The selection of the right type of reinsurance method helps an insurance company build a manageable portfolio of insured risks.