Who insures the reinsurers?
Insurance is a way for one to share with another the risks brought about by a certain activity. Insurance companies provide, in exchange for payment & based on insurance contracts, financial protection for companies and individuals. As with all institutions, they are exposed to risks which are inherent to their line of business. They dispose of a range of mechanisms which allow them to reduce their various risk exposures. As such, they have a choice between techniques referred to as horizontal division of insured risks (such as coinsurance) and those referred to as vertical risk division (such as reinsurance).
Reinsurance: a never-ending pyramid?
Insurance is a way for one to share with another the risks brought about by a certain activity. Insurance companies provide financial protection to businesses and individuals through insurance contracts, in exchange for payment. Like any entity, they are exposed to risks inherent to their activity. They have a variety of mechanisms at their disposal to reduce their various exposures. Thus, they have the choice between techniques known as horizontal division of the insured risks (such as the mechanism of co-insurance), and others, known as vertical division of these risks (such as the mechanism of reinsurance).
What is the vertical division of insured risks?
This risk division method involves the insurers using the reinsurance method. Reinsurance is a technique of vertical distribution of insured risks by which an insurer, or "cedant" to the reinsurance contract (reinsurance treaty, facultative reinsurance...), cedes to a third party insurance company: the reinsurer, all or part of one or several insured risks. The reinsurer can be a professional whose exclusive activity is the reinsurance of insurance companies, or a "mainstream" insurance company, offering this type of product.
Through the reinsurance mechanism, the reinsurer undertakes, in return for the payment of a premium, to compensate the ceding company for the losses incurred as a result of the realization of the reinsured risk in the proportions ceded to the reinsurance contract. The ceding company is the only one bound to its insureds. It is also the only one bound to the reinsurer by the reinsurance contract. Finally, and as a consequence, the policyholder of the insurance contract and the reinsurer have no contractual relationship.
The reinsurance method presents many benefits for the cedent. Depending on the contractual options chosen, the cedent can carefully enter new markets and develop their expertise within. The cedent can considerably increase their underwriting capacities by reducing their risk exposure. The cedent is also able to underwrite substantial risks such as the construction of transport superstructures: space vehicle launch pads, even the space vehicles themselves…
Can the reinsurer also be reinsured?
Most certainly. There is a market for reinsurers which is similar to that of reinsurance in which each of them can in turn cede all or part of one or several reinsured risks. This is called the retrocession market. Within this market, reinsurers who, in return for payment of premiums, accept to compensate other reinsurers for losses incurred as the result of a reinsured loss. This is like standard reinsurance: a reinsurer (who is here known as the retrocedent) considerably reduces their exposure to a reinsured risk by ceding it, in part or in totality, to another reinsurer (who is here known as the retrocessionaire). Again, only the ceding insurance company and the initial reinsurer are party to the reinsurance contract whilst the ceding reinsurer and the retrocession reinsurer are only party to the retrocession agreement.
Retrocession gives the retroceding reinsurer the same advantages as a ceding insurer. It can more easily conquer new markets, increase its underwriting capacity, and underwrite cutting-edge risks with considerable financial implications.
And beyond retrocession?
There is no specific nomenclature in terms of retrocession insurance. Retrocession is the equivalent of reinsurance for the reinsurer; all those involved in the retrocession are all reinsurers and all can retrocede the underwritten risks as much as possible and as much as they have an interest in doing so. This can lead to complex assemblies and can give rise to legibility problems in certain insurance claims.