What is a Reinsurance Assisted Placement?
Reinsurance-assisted placement is a new reinsurance contract initiated by a reinsurance company. Reinsurance is insurance for insurers (also called stop-loss insurance). A reinsurance company is a company that provides financial protection to insurers. Reinsurers manage risks, namely a major loss, that are too great for insurance companies to manage on their own.
While an assisted reinsurance placement is initiated by a reinsurance company, the majority of insurance contracts are initiated either by insurance companies or by insurance brokers. Reinsurance companies may have an incentive to generate reinsurance-assisted placements if they believe that the insurance company to which they outsource the business will then purchase reinsurance from them.
Key points to remember
- An assisted placement in reinsurance is a type of referral that is done between insurance companies.
- An assisted reinsurance placement occurs when a reinsurance company refers a new insurance contract to an insurer.
- The insurer will then generally reinsure this contract with the reinsurance company that made the referral.
- Depending on the nature of these parties’ reinsurance agreements, the insurer may not be obligated to reinsure the contract with the referring company.
How Reinsurance Assisted Investments Work
The reinsurance market is an important and significant part of the insurance industry. By purchasing reinsurance, insurance companies can manage your risk by offsetting part of their debts to other insurance companies. The companies that accept this risk, that is to say those that sell reinsurance, the reinsurance companies, are compensated by receiving part of the insurance premiums collected from the policyholders.
When entering into these agreements, both parties will negotiate around a reasonable level of insurance premiums that the insurer cedes to the reinsurer. This decision will be based on the perceived riskiness of the underlying liabilities, as well as the type of reinsurance contract being considered.
Types of investments assisted by reinsurance
Most reinsurance contracts can be divided into two different categories: Treaty and Facultative. Conventional contracts are agreements that cover a large group of policies, such as the entire automotive business of a primary insurer. Optional covers specific individual policies, such as a hospital, that would not be accepted under a treaty because they represent higher value policies or more dangerous risks.
For instance, collision reinsurance The contracts provide insurers with additional coverage in the event that the same loss results in the declaration of loss by more than one insured. Cash reinsuranceon the other hand, covers a subsection of the insurer’s policies when this subsection is deemed more risky than the insurer’s overall insurance wallet politics.
Most of the time, insurance contracts that are then reinsured are initiated either by the insurance company itself or by one or more insurance brokers. However, there are instances where the reinsurance company will initiate, or “place”, a new insurance contract on behalf of an insurance company. In this scenario, the insurance company can either choose to reinsure the contract with the reinsurance company or work with another reinsurance provider.
In the case of reinsurance treaty, the insurance company would be required to reinsure with the company that provided the reinsurance-assisted placement. In the case of optional reinsurancehowever, the insurance company could choose whether or not to reinsure with that particular company.
Example of placement assisted by reinsurance
To illustrate, consider the case of two hypothetical insurance companies: Insurance Corp. and Reinsurance Corp. The two companies have been doing business together for many years, Insurance Corp. regularly buying reinsurance from Reinsurance Corp. As new contracts are generated by its own salespeople, as well as its network of insurance brokers, Reinsurance Corp. will from time to time find its own business opportunities and refer such clients to Insurance Corp.
Since the two companies have a facultative reinsurance agreement rather than a conventional reinsurance agreement, Insurance Corp. is not obligated to deal with Reinsurance Corp. when purchasing reinsurance for its reinsurance-assisted investments. However, since the two companies have a good working relationship, they almost always choose to do so. In this sense, Reinsurance Corp. acts as a de facto insurance broker for Insurance Corp., in addition to acting as a reinsurer.