Reinsurance
Frequently, the scale of risks underwritten is too great for one insurer to carry safely. In these circumstances, companies use reinsurance to mitigate their own risk exposure.
Specialist reinsurance companies take on part of the risk that insurers assume from their personal or commercial clients. They can do this by sharing the losses among several carriers in the event of a claim. For this service, the reinsurer is paid a share of the insurance premium in accordance with its level of participation in the risks.
But reinsurance is not just sought for large risks like power plants, but also for smaller risks for specific losses such as roof damage to houses. Such smaller losses - as occurred after the hurricane in Birmingham a few years ago - while affordable individually could have a damaging impact on an insurance company when they occur in significant volumes. A reinsurer therefore assumes individual risks or assumes risks en bloc - that is, a share in a large number of individual risks.
Because of the scale involved, reinsurance companies need to be adept at looking into the future, to identify new types of risks early. Many operate globally, with specialist experts looking at the impact - worldwide - of the latest developments in areas such as genetic engineering, nanotechnology and extreme weather events.
