“I am not interested in knowing whether your reinsurers have paid or not; neither do I want to know who they are. What I want is my claim to be paid because you never talked about reinsurers when you were getting the business.”
These are sentiments from the public domain which compelled me to dedicate this column to shade some light on the role of reinsurers in the insurance business.
Risk transfer is the primary reason, if not the solitary essence, of insurance. When this risk is transferred to another party it is not eliminated, it is simply reassigned to another person.
The difference is that someone who has transferred the risk stands to recover any losses or damages from the one who accepts to carry the risk. It therefore insinuates that the insurer faces the same risk the insured faces except the former has established formal mechanisms in dealing with such risks.
They (insurer) operate a fund called a common pool where the losses of the unfortunate few are paid by the contributions of the fortunate many. Further the insurer’s ability to take risks is proportional to their capital.
With these limitations it means that insurers can only take on risks that are within their capacity. For example, the minimum capital for an insurer in Zambia is about $300,000 presently and going by this rationale insurers can theoretically only tale up risks up to that much.
Such an amount is realistically speaking less than some vehicles or just one building. One big loss can wipe out the entire fund or capital.
But what gives insurers the audacity to take on huge values that are more than their capital?
Apart from the common pool principle, this is where reinsurance comes in. The insurer will also seek to transfer/spread some of the risks they face to another party known as a reinsurer.
Therefore reinsurance is insurance of insurers. It takes place between an insurer and a reinsurer and sometimes there could be many reinsurers participating on a risk.
Almost all insurers have this backing in two forms i.e. by a treaty or facultative. The former is agreed to run over a period of time while the latter is arranged on a case by case basis usually on those risks that fall outside the treaty.
For example a treaty may have some terms such as an exclusion of a thatched roof on a fire treaty. Should a client want to insure his thatched roof building then an insurer will have to arrange facultative insurance.
Reinsurance is big business and that is why it gobbles about fifty per cent of the gross written premium in Zambia. With such arrangements insurers’ capacity is enhanced.
Rarely do the insured know about this arrangement that takes place behind the scenes. Only a few of those clients with some fair understanding of the reinsurance mechanisms worry about the reinsurer on their policies.
Most clients will place their trust in the insurer or their broker to ensure that their policies are well backed by reputable reinsurers.
The criticality of this much needed reinsurance support is tested at claims stage.
What normally happens after a loss which is reinsured is that the insurer will pay the loss and recover from the reinsurer. However some losses are so big that if an insurer was to pay the full outlay from their resources it may financially stretch them.
This is a key factor in dealing with insurance companies; their ability to meet big claims from their resources or liquidity. If an insurer is not liquid enough it will be calling upon reinsurers to pay their part before them (insurer) pay the insured.
Such a process of course is frustrating to the insured. Why should he/she be subjected to lengthy processes from a party they did not contract?
Well, an insurer should be able to provide answers to such queries. If an insurer is unable to pay a claim from its resources, it must be diligent enough to timely inform the insured.
There are of course some losses that require reinsurers to be involved just after the loss has occurred. The question is at what point should the customer be made aware of the role of the reinsurer, before or after the loss?
Just like the insured should take care of which insurer to place business with the, insurer should also take similar care on the reinsurance side. This is because failure by the reinsurer to efficiently settle a claim has a direct bearing on the reputation of the primary insurer.
I like reinsurers who profess that ‘they pay claims even before they occur.’ This theoretical slogan is meant to emphasis the need for efficiency in paying out claims.
It therefore means an efficient insurer needs to partner with an efficient reinsurer to deliver expected results to the insured and the insured should be made aware of the role of the reinsurer if this has the potential to impact claims settlement.
Comments: webster@picz.co.zm or webster_tj@hotmail.com or on face book search for Insurance Talk-Zambia page or call/text 0977 857 055
(The Author is a Chartered Insurer with more than 11 years industry experience).