Back to: Insurance
Welcome back, brilliant mind! I’m truly proud of how far you’ve come. Each week you show up means you’re serious about your future—and I’m right here with you.
Today, we’re going to learn something really interesting that happens behind the scenes of every strong insurance company. Let’s talk about reinsurance—the insurance for insurers!
Introduction
You already know how insurance works—people pay premiums to insurance companies, and in return, they get protection when things go wrong. But here’s a big question: what happens when the insurance company itself faces a huge loss, like during a major flood or a plane crash? That’s where reinsurance comes in.
Just like people insure their lives and property, insurance companies also protect themselves by buying insurance from other insurance companies. This is called reinsurance, and it’s one of the reasons why large insurers can stay stable, no matter what disaster hits.
Definition of Reinsurance
Reinsurance is a financial arrangement where an insurance company transfers part of its risks to another insurance company. The goal is to reduce the impact of large or unexpected claims.
The original insurance company is called the ceding company, while the one that takes on part of the risk is the reinsurer.
Think of it like this: You sell akara in large quantities. To protect your stock, you get insurance. But the insurer also wants to be safe—so they get another bigger insurer to take on some of that risk. That’s reinsurance.
Importance of Reinsurance
Risk Sharing: Reinsurance allows insurers to spread large risks so that no single company is overwhelmed by massive claims.
Financial Stability: When major events happen (like building collapse, fire outbreaks, or natural disasters), reinsurance ensures that the insurer doesn’t go bankrupt.
Increased Capacity: It allows insurers to take on more policies, even very large ones, because they know they’re backed by another company.
Support for New Insurers: Smaller or new insurance companies use reinsurance to manage big risks while growing their business.
Protection from Catastrophes: Events like plane crashes or epidemics can lead to many claims at once. Reinsurance helps insurers pay without delays.
Types of Reinsurance
Facultative Reinsurance:
This covers a specific individual risk or policy.
The reinsurer has the right to accept or reject each policy.
Example: An airline wants insurance for a new aircraft. The insurance company seeks facultative reinsurance because the risk is very large.
Treaty Reinsurance:
This is a general agreement covering a group or block of policies.
The reinsurer agrees to cover all risks that fall under a set category, without needing to approve each one.
Examples
Let’s say Niger Insurance covers a factory for ₦5 billion. That’s a lot of risk for one company. So, they enter a treaty with a reinsurance firm to cover any damage above ₦2 billion. That way, if a fire causes ₦4 billion in damage, Niger Insurance pays ₦2 billion and the reinsurer pays the rest.
Or consider a new insurer in Kaduna that wants to start selling large property policies. They use facultative reinsurance to get backup for a specific multi-storey building they’ve insured. That gives them confidence to serve bigger clients.
Summary
Reinsurance is simply insurance for insurance companies. It allows insurers to share large risks, remain financially stable, and serve more customers. There are two main types—facultative and treaty—and both help keep the entire insurance system strong and trustworthy.
Evaluation
In your own words, what is reinsurance?
Mention two reasons why insurance companies use reinsurance.
What is the difference between facultative and treaty reinsurance?
You’ve just learnt something many people working in the insurance industry don’t fully understand! Keep up this great energy. You’re growing stronger, smarter, and more ready for the real world. Afrilearn is always here to support your dreams!