Do you know that insurance companies also insure themselves against risk losses? This is called reinsurance. It is the concept where insurance companies re-insure themselves with bigger reinsurance companies for the purpose of diversifying insurance risks.
So if you insure your property or life with an insurance company, your insurer also goes ahead to reinsure itself with a bigger reinsurance company to reduce losses that may come with your claims.
How Reinsurance Works
To get this in perspective, seven insurance companies in the United States became bankrupt in 1992 when Hurricane Andrew caused massive damage that totaled $15.5 billion in Florida. These insurance companies wouldn’t have become insolvent if they had reinsured themselves with a bigger reinsurance company, for the reinsurance company would have borne part of the $15.5 billion loss caused by the hurricane.
So reinsurance or stop-loss insurance is the situation where insurance companies transfer a portion of their insurance risks to a bigger reinsurance company who reduces the financial obligation that comes from a massive insurance claim.
The insurance company that enters into an agreement to cede part of its risk portfolios to a bigger reinsurance company is called a – a ceding party or cedant; and the company that accepts to take on the risks of the ceding party is called the reinsurer. To activate the contract, the ceding party pays a part of the premiums it collects from insured parties to the reinsurer under a suitable agreement.
The two Reinsurance companies in Nigeria
In Nigeria, there are basically two reinsurance companies that take on the portfolio risks of all other insurance companies in the country. There is Nigeria-Re and Africa-Re.
Nigeria Reinsurance Corporation was set up under the Nigeria Reinsurance Corporation Act No. 49 of 1977 and it started operations on January 1, 1978. It was wholly owned by the federal government until 2002 when it was privatized with the government retaining some shares. The federal government started Nigeria-Re with a grant of N1.5 million but today it has grown to N7.5 billion through authorized shares.
Africa-Re was established in 1976 by 36 African countries with the support of the African Development Bank (AfDB) and is headquartered in Lagos, Nigeria. It is the largest reinsurance company in Africa in terms of net reinsurance written premiums and operates in six regional countries which include Morocco, Cote d’Ivoire, Kenya, Egypt, Mauritius, and Nigeria. It has a local office in Ethiopia and an underwriting representative in Uganda while maintaining subsidiaries in South Africa and Egypt.
Types of Reinsurance Businesses
There are two main categories of reinsurance operations – facultative reinsurance and treaty reinsurance.
Facultative Reinsurance
This category of reinsurance enables a reinsurer to protect the ceding party for individual or specified risks, while larger or diversified risks are reinsured separately under renegotiated terms. The reinsurer is not obligated to offer facultative reinsurance and the ceding party is not compelled to sign its contract.
For this facultative reinsurance, the contract enables the ceding party and the reinsurance company to share risks and premiums on either a proportional or non-proportional model. For the proportional, the reinsurer may not pay proportional compensation on filed claims; and in the non-proportional, the reinsurer pays when the claims exceed a given compensation level.
Treaty Reinsurance
This category does not operate on a contract or portfolio of risk basis, but it works for a designated period of time under which an entire group of risks or a portion may be insured. Under this model, it is possible for obligations to be pursued between the reinsurer and the cedant.
All insurance companies are advised to get reinsured with reinsurance companies to protect them from solvency in the case of massive risk events and to facilitate the coverage of higher and larger volumes of risks without increasing operational costs.
It also helps the ceding party to be reimbursed by the reinsurance company for processing new businesses, underwriting them, and acquiring them on a contractual basis. To some extent, reinsurance may also reduce the government tax payable by an insurance company.
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