Reinsurance tutorials #1 • The Basics
What is insurance?
The world of reinsurance is a fascinating industry. It comes as no surprise that the term “reinsurance” contains “insurance”, as without insurance, no reinsurance is possible.
Insurance is a well-known concept around the world. France, for instance, is one of the countries with the largest number of compulsory insurances, be it related to one’s home (building, content) or to one’s liability (such as motor insurance, among others).
No matter how well individuals and companies behave, an accident can always happen.
This is when insurance comes in, as a service to people, industries and society as a whole.
The purpose of insurance is to protect, with a fixed price, individuals, groups and companies against damages caused by the occurrence of a sudden, unexpected upset that will create a claim affecting one’s property, life, health or liability towards a third party.
A fixed price is small but certain, while a damage is uncertain but could be too big to be sustainable.
An insurer is a company that provides insurance; takes risks or commitments expressed in a ‘sum insured’ and, in exchange for this service, asks for a ‘premium’.
To fix his price, the insurer will study past statistics, the nature of the risk covered, look into the potential future developments and the volatility of his book or portfolio of similar risks. The bigger the size of the book, the lower the volatility of the risk, the cheaper the price he can offer. All this without forgetting about competition.
In a book, there is a number of factors of uncertainty for the insurer, notably:
- Is the fixed price based on the right assumptions? Sometimes, especially for new emerging risks like cyber or changing ones (climate), there may be no past statistics, or these statistics may have evolved.
- If the risk is small, there might be accumulations of claims due to events like storms, floods, earthquakes or the like, which make a global loss unsustainable for the insurer.
- There is an increasing number of types of risks, and our society is more and more adverse to risk. Therefore, the need for insurance is greater.
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