Reinsurance tutorials #3 • The Basics
What is risk?
Reinsurance is a fascinating industry that is badly needed, provides a service to the whole of society, tackles all types of risks and deals internationally with different cultures.
“Risk is beautiful”, according to Plato. People love risk. It is a service, a challenge, a duty, an added value to clients, but also a pleasure and a price!
Shareholders expect a return from reinsurers companies by taking risks with their money; the job of reinsurers is to assess the risks properly, give the right price and commit to their own resources and risk appetite to avoid danger.
There are traditional types of risks covering damages such as properties with fire (the 1st reinsurance company, Cologne Re, was founded In 1842 after the city of Hamburg burnt down), theft, motor, and so on, not forgetting marine which was the first type of insurance with merchants from Venetia, and later following the rising of UK with the creation of Lloyd’s.
There are CAT risks such las earthquakes, floods, hail, storms, volcanic eruptions.
There are risks that appear with the evolution of society: construction, engineering, aviation, space, but also cancellation of events, trade credit, or even loss of image for brands like Perrier.
There are risks covering all kind of liabilities for a person or a company towards third parties.
There are risks linked to persons: Life and Health, Credit, and so on.
There are always new risks emerging like nuclear, cyber or others which have unplanned, dramatic effects not calculated before, raising the question of insurability like the Coronavirus pandemic we are going through with ever increasing loss of life.
Reinsurers have different methods to face these risks:
- Properly assess the risk according to past statistics, if any, and expected future developments, which implies a price required by insurance companies
- Choice of clients: trust is a key element of any partnership. But the financial position of clients must also be assessed, as well as their strategy, the quality of their underwriting risks (selection and pricing), the claims management
- Share of the the risk with the clients: the clients should be financially interested in the result of the business they do write, thus keeping a share on it called retention, and with the ones protecting insurance companies, their own reinsurers!
Control their own potential accumulations on any kind of risk to not put their company in danger, control difficult scenarios like the COVID 19 pandemic which are not always foreseen.
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