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Finance: What is reinsurance? 7 Views
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Transcript
- 00:00
and finance Allah shmoop What is re insurance Oh all
- 00:07
right people When life takes a swing at you you'll
- 00:09
be glad you bet against yourself with insurance Did you
- 00:13
get into a car accident Well good thing you bet
- 00:16
that you would Now you get a car insurance payout
Full Transcript
- 00:19
in the hospital while you won your own bed against
- 00:22
yourself Because you win a health insurance payout Well the
- 00:25
insurance industry makes these bats with us They bet you'll
- 00:29
be fine I'll collect those premiums In the meantime thank
- 00:33
you While you're betting my life is a dangerous place
- 00:37
and I'm a mere mortal meat bag from individuals to
- 00:40
companies insurance seems available for well pretty much anyone to
- 00:44
buy to bet against themselves Everyone except the insurance company
- 00:48
Pretty much But who Insurers Insurance companies How can we
- 00:52
trust that they'll be there with our payouts when we
- 00:55
need them What if they go under because other people's
- 00:57
payouts made their funds run dry while the answer insurance
- 01:01
companies ensure each other i e They deploy reinsurance insurance
- 01:06
companies cover themselves by covering each other That's reinsurance That's
- 01:10
what it is You might have thought Insurance companies air
- 01:12
all competitors enemies to each other But in fact they're
- 01:15
more like frenemies Who coop it Tate Take Ricky's insurance
- 01:23
company right here This guy They cover a lot of
- 01:25
people's homes in case of an earthquake Well guess what
- 01:29
When the earthquake struck Ricky's insurance company got lucky It
- 01:32
was big enough and that was making enough money from
- 01:34
investing all those monthly premiums to make the promised payouts
- 01:38
to the quake stricken homeowners And when it was time
- 01:41
there was only a few $1,000,000 worth of damage and
- 01:43
that was it Ricky took on all of that risk
- 01:45
is an insurance company and ended up well basically dodging
- 01:49
a bullet But just down the road Ricky's brethren Romans
- 01:53
didn't fare so well Roman's insurance company also in the
- 01:56
quake insurance biz had to make a big payouts after
- 02:00
the town was shaken not stirred Romans insurance company insured
- 01:49
300 freestanding homes all of which were left completely decimated
- 02:07
Now Romans and Wells left with a cool $382,000,000 to
- 02:12
pay out and they don't have that money on hand
- 02:15
right Romans had no choice but to close up shop
- 02:18
in declare bankruptcy leaving all those homeowners with quake and
- 02:21
shake insurance from Romans Insurance Company up this creek While
- 02:25
this situation is obviously not so great for Roman it's
- 02:27
also not so great for the entire insurance industry either
- 02:31
How can people be sure their insurance company will be
- 02:34
there to pay when they need them to pay well
- 02:37
without a guaranteed payout as agreed upon in the initial
- 02:39
insurance contract during the insurance time of need it becomes
- 02:42
too risky for your average Joe to be paying monthly
- 02:45
premiums What's the point of paying every month if you're
- 02:48
not even sure your insurance company will be there to
- 02:50
cover you when you need him Alas a new era
- 02:53
was born in the insurance industry Insurance companies banded together
- 02:56
Is frenemies spreading risk among themselves keeping each other and
- 03:00
therefore their whole industry afloat People no longer had to
- 03:03
worry about being left high and dry by their insurance
- 03:06
company because like them their insurance company was insured more
- 03:10
left So in order to manage the risk of complete
- 03:12
company death the world of reinsurance began to be a
- 03:16
thing in the reinsurance biz There's the seeded company this
- 03:21
thing the one getting insured seeding the dough and the
- 03:24
reinsurer the one taking on some risk for the other
- 03:28
insurance company Well as with your insurance your insurance company
- 03:31
if they're reinsured pays premiums to the reinsurance company in
- 03:34
exchange for a come rescue me when I need you
- 03:38
Ticket Well there are two main types of reinsurance contracts
- 03:41
Treaty reinsurance and faculty tive Reinsurance Yeah say that three
- 03:45
times Fast Treaty reinsurance is more broad covering an area
- 03:49
of an insurance company's risk For instance treaty insurance might
- 03:52
cover a company's earthquake insurance contracts but not flood and
- 03:55
or fire While treaty reinsurance is more general insurance for
- 03:59
insurance companies faculty tive reinsurance is the emergency insurance It's
- 04:04
pretty specific covering more unusual situations that might occur like
- 04:08
Martian happenings or huge earthquakes or ah Noah like flood
- 04:12
faculty tive reinsurance is there to cover everything that treaty
- 04:15
reinsurance doesn't When the you know what hits the fan
- 04:19
how do insurance companies ensure each other There are different
- 04:22
types of reinsurance for instance proportional and none proportional those
- 04:27
air two types proportional reinsurance means the reinsurer agrees to
- 04:31
cover a percentage of an insurance policy For instance Ricky's
- 04:35
insurance company could have agreed to be a reinsurer for
- 04:38
Romans insurance company for earthquake insurance is up to 70%
- 04:42
of the damages We'll that would also mean Ricky's insurance
- 04:44
company gets some of the premium payments from Romans insurance
- 04:47
company non proportional reinsurance on ly kicks in once the
- 04:51
seeding company company paying out the dough in premiums passes
- 04:55
a retention limit For instance Romans could buy reinsurance from
- 04:59
Ricky's which would cover claims over $10,000,000 add up to
- 05:03
like $100,000,000 Romans would be responsible for covering the 1st
- 05:07
10,000,000 on its own but would get some help from
- 05:09
Ricky's if claims were larger than 10,000,000 bucks Ricky's will
- 05:13
cover all claims after the 10,000,000 mark But well they
- 05:16
stopped short of 100,000,000 mark because hey they aren't made
- 05:20
of money Any earthquake claims exceeding 100,000,000 mark would be
- 05:23
back on Romans They're also rules that re insurers can
- 05:27
apply the contracts each called basis like risks attaching basis
- 05:31
and losses occurring basis risks attaching basis means claims can
- 05:37
be made later after the reinsurance contract has expired Will
- 05:40
the event that led to the claim needs to have
- 05:42
happened within the contracts time frame But the insurance claim
- 05:45
from that event can happen later And the reinsurer well
- 05:48
they just need to pay up well For instance let's
- 05:50
say Randy a homeowner with earthquake insurance covered by Romans
- 05:54
Insurance Company was on vacation when the quake was a
- 05:57
shaken well Ricky's was covering Romans on a proportional earthquake
- 06:01
contract Randy came home to find his house well gone
- 06:04
making his claim much later than everyone else is In
- 06:07
the meantime you have quite reinsurance contract between Ricky's and
- 06:09
Romans expired Ricky's would still have to cover Randy via
- 06:13
Romans insurance company at the agreed upon percentage in the
- 06:16
now expired contract since the earthquake happened when the contract
- 06:20
was still a thing but only if the reinsurance had
- 06:22
a risks attaching basis That's the only way they get
- 06:25
paid legally Losses occurring basis is kind of the opposite
- 06:29
where all claims during the reinsurance contract period are covered
- 06:32
If the earthquake contract between Ricky's and Romans was on
- 06:35
a losses occurring basis well then it means Romans would
- 06:38
have to cover Randy on its own without the help
- 06:40
of Ricky's A loss is occurring bases reinsurance structure means
- 06:45
that only claims during the contract period or covered making
- 06:47
the reinsurer not responsible for anything once it's expired So
- 06:52
yeah once insurance companies finally sat down on the table
- 06:54
together they began making all kinds of reinsurance deals All
- 06:57
of the seeding insurance companies went cover themselves so they
- 07:00
can remain solvent in the long run And all of
- 07:02
the insurer insurance companies want to make sure they aren't
- 07:06
taking on too much risk Some insurance companies find themselves
- 07:09
on both sides sometimes as the seeding company and sometimes
- 07:12
as the insurer That being said there are specialised re
- 07:15
insurance companies companies that on Lian sure other insurance companies
- 07:19
So yeah that's reinsurance for Ricky's and Romans It's sort
- 07:22
of in I've got your back Jack You've got mine
- 07:25
Situation comes in handy when one of them has an 00:07:28.521 --> [endTime] itch Yeah
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