Finance: What is reinsurance?

College and CareerPersonal Finance
CoursesFinance Concepts
FinanceFinance Definitions
Financial Responsibility
Personal Finance
Finance and EconomicsTerms and Concepts
LanguageEnglish Language
Life SkillsFinance Definitions
Personal Finance
SubjectsFinance and Economics

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