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Understanding reinsurance, its purposes, and its benefits

On Behalf of | Jan 4, 2023 | Insurance Law |

For residents of Washington, insurance policies are designed to transfer the risks they might face from unanticipated events. When a natural disaster occurs, many claims might be filed with a single insurance company. For example, a large fire or earthquake could lead to thousands of claims, potentially resulting in the insurance company’s inability to cover all of them. To protect against potential insolvency, many insurance providers purchase reinsurance policies.

What Is reinsurance?

Reinsurance is a type of policy allowed under insurance law that can be taken out by insurance companies so that they can spread some of the risks to others. Insurers might purchase reinsurance for the following purposes:

  • Limit the potential liability faced by the insurer for a specific risk
  • Protect both their companies and their insureds against disasters
  • Increase their capacity to issue policies
  • Stabilize the issuing company’s experience with losses

Risk transfer companies issue reinsurance policies that allow insurers to spread the risks they face to numerous insurance companies. This can help to prevent insolvency when a major disaster occurs and multiple claims are filed with a single carrier.

Benefits of reinsurance

There are several benefits of reinsurance for both insurance companies and their policyholders. By purchasing reinsurance coverage for less than the amount the insurance company receives in policy premiums, the insurance company can earn additional profits. It also allows insurance companies to transfer risk to other companies so they won’t have to absorb huge losses. Reinsurance benefits policyholders by protecting their ability to recover compensation from their filed claims when a large number of claims are filed with the same company.

Reinsurance helps the insurance market to remain solvent when disasters occur. When an insurance company has reinsurance, they are likelier to be able to satisfy filed claims so that policyholders can receive the compensation to which they should be entitled.