What Is Reinsurance?

As a consumer, it’s possible you’ve never even heard of the term reinsurance. However, insurance providers are very familiar with this term, and it may help you better understand your coverage. You can think of reinsurance as insurance for insurance companies. Every insurance company takes on financial risk by offering coverage for things like vehicles, homes, commercial operations, etc. Working with a reinsurer allows your insurance provider to transfer some of that financial risk to another insurance company, called a reinsurer.  

How Does Reinsurance Work? 

To understand how reinsurance works, it helps to look at the relationship between primary insurance companies and reinsurers. When a primary insurer sells policies to clients, it takes on the financial risk of those policies. Through a reinsurance agreement, the insurer transfers part of that risk to another company – the reinsurer. 

This arrangement allows the primary insurer to protect itself from significant losses, especially those caused by catastrophic events, such as a heavy storm year, or high-value claims. Reinsurance contracts are carefully negotiated to define the scope of coverage, the types of risks involved and the financial responsibilities of each party. 

Types of Reinsurance 

There are three reinsurance agreement types that are most commonly used between insurance providers and reinsurers.  

Treaty Reinsurance 

This is a long-term agreement, meaning the insurance provider and the reinsurer will enter a contract covering standard coverages at a high volume. 

Facultative Reinsurance

This other form of reinsurance is more of a “one-off” agreement, meaning the risk is assessed on an individual basis, probably for a complex or unusual risk. 

Hybrid Treaty and Facultative

In this agreement, both treaty and facultative elements are present.   

Benefits of Reinsurance for Insurers 

So, how does reinsurance benefit the insurer? The benefits of reinsurance are numerous and essential to the health of the insurance industry: 

• Risk Mitigation: Reinsurance helps insurers manage exposure to large or unpredictable losses.
• Financial Security: By sharing risk, insurers can maintain stronger financial reserves.
• Business Growth: Reinsurance enables insurers to expand their offerings and take on more clients.
• Loss Stabilization: It helps smooth out the financial impact of claims over time.
• Regulatory Compliance: Reinsurance can help insurers meet capital requirements set by regulators.

How Reinsurance Helps Insurance Providers Serve Clients 

Ultimately, the benefits of reinsurance extend beyond the insurer by directly impacting the quality and reliability of service that clients receive. 

1. Stabilizes Premium Rates

By entering a reinsurance agreement, your insurance provider is able to transfer risk to the reinsurer. This means your insurance provider does not necessarily feel the financial burden when a loss event takes place (a claim is filed) because the reinsurer agreed to cover this loss. Without reinsurance, insurers must calculate premium rates based solely on their own risk exposure. This can lead to higher premiums or sudden rate changes. With reinsurance, primary insurance companies and reinsurers agree on risk levels, allowing them to fix premium rates more effectively. Sharing the financial burden helps keep premiums stable and predictable for clients. 

1. Provides Protection After Natural Disasters and Large Calamities

When a large number of clients file claims due to a widespread event, like a hurricane or wildfire, the financial strain on the insurer can be immense. Reinsurance provides a safety net, ensuring that insurers can continue to pay claims and support their clients during difficult times. 

3. Allows Insurers to Take More Clients

Reinsurance strengthens an insurer’s financial foundation, allowing them to take on more risk. This means they can insure more people and offer broader coverage options without having to compromise their financial health. 

4. Reduces the Number of Insurance Policies Clients Need to Buy

With reinsurance support, insurers can offer more comprehensive products that cover complex or expensive needs. Clients benefit from streamlined coverage, better customer service, faster claims processing and the convenience of working with a single provider instead of juggling multiple policies from different companies. 

Ready to learn more about how Farm Bureau Financial Services protects what matters most?

Contact a local agent at Farm Bureau today to explore coverage options backed by a strong and stable provider.