Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. New Ventures. Search Search:. Jun 14, at PM. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.
With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world. Follow DanCaplinger. Image source: Getty Images. Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer. The unearned premium reserve is the amount of premiums equal to the unexpired portion of insurance policies, i.
The loss reserve is made up of funds set aside to pay future claims. The reduction in these two accounts is commensurate with the payments that can be recovered from reinsurers, known as recoverables. By statute or administrative practice, all states but with considerable variation recognize and grant credit on the financial statement for the reduced financial responsibility that reinsurance transactions provide.
An alien company can also participate in the U. For many years, few people outside the insurance industry were aware that such a mechanism as reinsurance existed. The public was first introduced to reinsurance in the mids, during what has now become known as the liability crisis.
A shortage of reinsurance was widely reported to be one of the factors contributing to the availability problems and high price of various kinds of liability insurance. These investigations culminated in a widely read report, "Failed Promises: Insurance Company Insolvencies," published in February The publicity surrounding the investigations and the poor financial condition of several major life insurance companies prompted proposals for some federal oversight of the insurance industry, particularly insurers and reinsurers based outside the United States.
However, no federal law was enacted. While a large portion of the insurance industry opposes federal regulatory oversight, many U. A critical tool for evaluating solvency is the annual "convention" statement, the detailed financial statement submitted by all insurance companies to the NAIC. In , for the first time, the annual statement required insurers ceding liability to unauthorized reinsurers those not licensed or approved in a designated jurisdiction to include the amount of incurred but not reported IBNR losses in addition to known and reported losses.
IBNR losses are losses associated with events that have already occurred where the full cost will not be known and reported to the insurer until some later date. This requirement reflects regulators' concern that all liabilities are identified and determined actuarially, including IBNR losses, and that IBNR losses are secured by the reinsurer with additional funds or a larger letter of credit than otherwise would have been required.
In the mids, some reinsurance companies that had entered the reinsurance business during the period of high interest rates in the early s left the market, due to insolvency or other problems. Those that fail to pay attention to the riskiness of the business they are underwriting may end up undercharging for coverage and going bankrupt as a result.
Consequently, some of the insurers that reinsured their business with these now-defunct companies were unable to recover monies due to them on their reinsurance contracts. The rule helps regulators identify problem reinsurers for regulatory actions and encourages insurers to purchase reinsurance from companies that are willing and able to pay reinsured losses promptly. Concern about reinsurance recoverables led to other changes in the annual financial statement filed with state regulators, including changes that improve the quality and quantity of reinsurance data available to enhance regulatory oversight of the reinsurance business.
Reinsurers subsequently reassessed their position, which in turn caused primary companies to reconsider their catastrophe reinsurance needs. When reinsurance prices were high and capacity scarce because of the high risk of natural disasters, some primary companies turned to the capital markets for innovative financing arrangements. Catastrophe Bonds and Other Alternative Risk Financing Tools: The shortage and high cost of traditional catastrophe reinsurance precipitated by Hurricane Andrew and declining interest rates, which sent investors looking for higher yields, prompted interest in securitization of insurance risk.
Funds to pay for the transaction should money be needed, are held in U. Surplus notes are not considered debt, therefore do not hamper an insurer's ability to write additional insurance. In addition, there were equity puts, through which an insurer would receive a sum of money in the event of a catastrophic loss in exchange for stock or other options. Commercial banks and other lenders have been securitizing mortgages for years, freeing up capital to expand their mortgage business. Insurers and reinsurers issue catastrophe bonds to the securities market through an issuer known as a special purpose reinsurance vehicle SPRV set up specifically for this purpose.
These bonds have complicated structures and are typically created offshore, where tax and regulatory treatment may be more favorable. Develop and improve products. List of Partners vendors.
Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit their own total loss in case of disaster. Described as "insurance of insurance companies" by the Reinsurance Association of America, the idea is that no insurance company has too much exposure to a particularly large event or disaster.
The Reinsurance Association of America states that the roots of reinsurance can be traced back to the 14th century when it was used for marine and fire insurance. Since then, it has grown to cover every aspect of the modern insurance market. There are companies that specialize in selling reinsurance in the United States, there are reinsurance departments in U.
A ceding purchases reinsurance directly from a reinsurer or through a broker or reinsurance intermediary. By spreading risk , an individual insurance company can take on clients whose coverage would be too great of a burden for the single insurance company to handle alone. When reinsurance occurs, the premium paid by the insured is typically shared by all of the insurance companies involved.
If one company assumes the risk on its own, the cost could bankrupt or financially ruin the insurance company and possibly not cover the loss for the original company that paid the insurance premium. For example, consider a massive hurricane that makes landfall in Florida and causes billions of dollars in damage. If one company sold all the homeowners insurance, the chance of it being able to cover the losses would be unlikely. Instead, the retail insurance company spreads parts of the coverage to other insurance companies reinsurance , thereby spreading the cost of risk among many insurance companies.
Insurers purchase reinsurance for four reasons: To limit liability on a specific risk, to stabilize loss experience, to protect themselves and the insured against catastrophes, and to increase their capacity. But reinsurance can help a company by providing the following:. Regulations are designed to ensure solvency, proper market conduct, fair contract terms, rates, and to provide consumer protection. Specifically, regulations require the reinsurer to be financially solvent so that it can meet its obligations to ceding insurers.
Life Insurance. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice.
Popular Courses. Table of Contents Expand. Basics of the Business Model. Contract of Reinsurance. Collateral and Other Regulations. Key Takeaways Reinsurance, or insurance for insurers, is the practice of risk-transfer and risk-sharing between and amongst insurance companies. Treaty resinsurance involves one insurer buying broad coverage from a dedicated reinsurance issuer that covers all of the insured company's policies.
Facultative reinsurance covers a single risk or a block of risks held in the primary insurer's book of business. Reinsurers handle complex risks and must meet certain regulatory and financial conditions in order to operate. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
0コメント