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How reinsurance spreads the risks to guarantee settlement of claims
The insurance and reinsurance markets are drastically evolving in an unpredictable world of new risks, either underestimated or just dynamic and challenging to model. We have witnessed rising costs of claims since the onset of the Covid-19. The world is now being bogged down by skyrocketing global inflation that no one knows its end.
As risks and costs of cover rise, insurers look for other entities to shoulder these burdens. This is where reinsurance comes in- still not well understood but is a major element within the industry.
Reinsurance, at its core, is transferring risks and spreading those that are consistent or are supported by the theory of insurance. Insurance is concerned with spreading risks, especially when policyholders pool their peril of loss and transfer them to insurance companies. The insurance company accepting the potential loss charges premiums based on the probability of risks of loss.
The way policyholders spread risks of loss by buying insurance, is how an insurance company spreads those risks for policyholders to reinsurers in exchange for a share of premiums received from its policyholders. In other words, insurance companies accept risks from customers and then pass them to someone else known as a reinsurer at a fee.
Kenya Reinsurance Corporation, or Kenya Re, is a perfect example of reinsurance. It has operated in the reinsurance space longer than its peers. It currently provides reinsurance to over 480 companies in more than 80 countries in Africa, the Middle East, and Asia. First, reinsurance makes risks bearable - insuring many homes, vehicles, businesses and other properties against damages or loss is a huge risk, especially when there is a high probability of losses.
Reinsurance is an excellent strategy for managing risks because it allows an insurance company to transfer some of them to a reinsurance company rather than shouldering the entire burden alone. This makes a lot of sense given that when the burden is unbearable, we often need someone to come through whether at a cost or not.
Secondly, reinsurance expands capacity by reducing the risks of insolvency, allowing an insurance company to accommodate more policyholders. In other words, reinsurance allows an insurance company to write more business using the reinsurer’s capital in lieu of the insurer pumping in additional capital to accommodate more risks as per the regulatory requirements.
This brings me to the third importance of reinsurance, which is stabilising losses. It means that though an insurance company can pay all claims within a short period, such a scenario can lead to an inimical financial situation and instability.
However, reinsuring guarantees stability when an insurance company is ambushed with huge claims that have the potential of causing severe strains. Further, reinsurance allows an insurance company to focus on expansion because significant loads of risks have been lifted.
Finally, reinsurance helps in risk advisory and technical resource building. A reinsurance company has highly qualified and seasoned personnel with global experience in territorial scope which helps them cluster and treats risks with utmost precision. This is a quality benefit that insurance companies leverage while transferring risks to reinsurers.
The writer is the acting MD Kenya Re