Who insures insurance companies?
While memories of the devastating fire/floods of June 3, 2015 remain fresh on our minds, the dilemma of many Ghanaians regarding the capacity of our insurers to adequately honour the claims arising there on has come to the fore.
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Industry pundits have, however, expressed confidence in the ability of insurers to honour the claims, since most insurers have also reinsured the risks. For reinsurance, an insurer would, typically, pay a percentage of premiums received on a particular risk to a specialised company called a reinsurer in order to share the risk, so that in the event of loss / damage, both the insurer and reinsurer would contribute to the claim based on their proportion of premium received and shared.
Understanding Reinsurance
As insurers accept risks and share same with other insurers and reinsurers, a sense of security and peace of mind is established since some losses could be beyond the reach of individual insurers.
In spite of the fact that insurers often base their businesses on calculated predictions, certain occasions require the sharing of risks. A reinsurer, therefore, becomes an eminent partner. Typically, the risk transfer mechanism may be adopted on account of the following:
1. Insurer wants to venture into new risks;
2. Insurer is faced with risks larger than own capacity; and
3. Insurer wants to protect own business portfolios.
Meanwhile, the premium kept by the insurer is called retention and what is given out to the reinsurer is called cession; thus, making the insurer the ceding party transferring part of the accepted risk to the reinsurer.
Similarly, reinsurers may also transfer part of their risks to the third level of insurance called retrocession. In reinsurance arrangements, the client is usually not privy to this arrangement between the insurer and the reinsurer.
The client is only settled by the insurer on the full value of the risk in the event of a claim. The insurer then falls on the reinsurer to pay its share of the claim amount as previously agreed upon.
While memories of the devastating fire/floods of June 3, 2015 remain fresh on our minds, the dilemma of many Ghanaians regarding the capacity of our insurers to adequately honour the claims arising there on has come to the fore.
Industry pundits have, however, expressed confidence in the ability of insurers to honour the claims, since most insurers have also reinsured the risks. For reinsurance, an insurer would, typically, pay a percentage of premiums received on a particular risk to a specialised company called a reinsurer in order to share the risk, so that in the event of loss / damage, both the insurer and reinsurer would contribute to the claim based on their proportion of premium received and shared.
Benefits of Reinsurance
The following are some essential benefits of reinsuring risks:
1. Catastrophe/Solvency Margins:- Since insurers are not immune from catastrophes which could lead to insolvency, the purchase of surplus relief insurance, therefore, allows companies to accept new clients and avoid the need to raise additional capital.
2. Capital Management/Stability:- Insurers typically concern themselves about avoiding fluctuation in claims costs, as they often have debilitating effects on the companies’ sustenance. Insurers can, therefore, avoid this phenomenon by passing / sharing risks to free up excess capital.
3. Capacity:- Suffice it to say, some risks may be bigger than the capacity of an individual insurer; thereby leading to some risks either being turned down or partly accepted. Reinsurance, therefore, helps in large risks mitigation as the risks would be shared between the partnering companies.
4. Security:- If buying insurance gives clients peace of mind, then, reinsuring the same risk gives the insurer peace of mind as the insurer has a relief from the uncertainties of losses.
5. Macro Advantages- The impact of losses does not rest on one economy, as the cost of the risk is spread around the market place and across the world.
The reinsurance market space
The main players in the reinsurance market place include brokers, insurers and reinsurers themselves. In some jurisdictions, reinsurance arrangements are facilitated by brokers who would typically arrange a relationship between an insurer and the reinsurer. The following are two main forms of reinsurance arrangements:
1. Facultative reinsurance:- Where risks are offered on a one-off basis and it is up to the reinsurer to accept the risk or not based on factors such as history of the insurer and/or client. This arrangement is, however, associated with high cost.
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2. Treaty reinsurance:- In this insurer-reinsurer relationship, risks are proportionately ceded to the reinsurer; hence, the reinsurer has no right to decline any risks and the insurer cannot also be selective in the types of risks to cede.
Indeed, the reinsurer necessarily accepts all the risks without an option; thus, relieving the insurer of the challenges in arranging such partnerships on case-by-case basis. This is similar to the case of a standing order arrangement with a bank, as against frequently issuing cheques. A good balance is, therefore, expected of the reinsurer in order that it will continue to be in business.
Meanwhile, reinsurance may also be taken where multiple insurers share common risks. This further limits the claims obligations on individual companies. In this regard, insurers may have the luxury to take on risks larger than they could individually handle, since they could share both the risks and premiums with other insurers.
Reinsurance in Ghana
In Ghana, the three known reinsurance companies are the Ghana Reinsurance Company, Mainstream Reinsurance Company and GN Reinsurance Company. Traditionally, the Mainstream and Ghana Reinsurance companies enjoyed a duopoly, until the advent of GN Reinsurance. Insurance companies in Ghana, therefore, have the luxury of sharing risks with either of these three companies or some others outside the country.
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Meanwhile, some of the world’s most renowned reinsurers include Hanover Re, Munich Re and Swiss Re, all with endowed capacity to absorb huge risks and honour claims in the event of losses.
The way forward
In order to enhance local capacity, however, insurers are encouraged to exhaust the local content before seeking external partnerships. This will help address the issue of some insurers and brokers placing businesses overseas without exhausting the local capacity.
Apart from concerns of developing our local economy, suffice it to say, our local reinsurers have the capacity to handle most risks presented to them.
Until next week: “This is insurance from the eyes of my mind.”
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