Are you wondering who insures insurance companies? Do you wonder how insurance companies get themselves insured or do you think they do not face risks?
The truth is insurance companies are not risk-proof. They are susceptible to risks as well as the numerous bodies and organizations they insure. Since they insure others how then do they get insured?
In this article, I will tell you who insures insurance companies and how the process of insuring insurance companies works.
It is needful to stress that insurance companies are susceptible to risks as well as other companies. The risks they face come from insuring others and also in the carrying out of their duties as insurance providers.
Typically, insurance companies are designed with a framework that shoulders all of the potential risks involved in the insurance process. It is normal for them to cater to the needs of individuals and organizations seeking insurance and also for their insurance needs as well.
Here’s how the process of insuring insurance companies works.
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How Insurance Companies Insure Themselves
First and foremost, most insurance companies perform an action that can be best described as ‘self-insurance’. The concept of self-insurance is one that sees the insurance companies reserve funds to cover for any unexpected events and payouts under the policies. It is saving or investing money to provide some form of sustenance on rainy days.
Self-insurance is used by big and well-established insurance companies. This set of insurance companies have large reserves and can easily make up for losses, unlike smaller insurance companies.
Hence, insurance for insurance companies is done by themselves. Although this is not always the case and there are other ways insurance can be carried out for insurance companies.
Reinsurance Companies Insures Insurance Companies
The best and most precise answer to give about who insures insurance companies is Reinsurance Companies. Reinsurance companies insure insurance companies by taking a pool of the portions of insurance policies underwritten by insurance companies. They do this in exchange for a certain amount of money.
Reinsurance companies insure a given pool of partial policies and may hold all or a part of the risk involved in sharing other parts among other reinsurance companies.
To understand how reinsurance works, it is crucial to look at what reinsurance is about.
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What is Reinsurance?
Reinsurance is a term used to refer to an agreement that sees the transference of portions of risk portfolios to other parties so that the likelihood of having to pay a large sum of money resulting from an insurance claim will be reduced.
The goal of reinsurance is to reduce the burden of having to manage insurance underwritten by insurance companies. This is achieved by spreading the risks across alternative institutions to lessen and cushion the effects of risk.
Reinsurance companies receive part of a large obligation in exchange for an agreed amount of money to be paid by the insurance company. The insurance company giving some part of its insurance responsibilities is called the ‘Ceding party’ while the reinsurance company receiving the risks is called ‘the reinsurer’.
Another means through which insurance companies insure themselves is by securitizing some risks in the capital market.
Securitizing Risks in Capital Market
Insurance companies get insured by securitizing risks in the capital market. The capital market is known as Insurance-Linked Securities (ILS). With this, insurance companies are given a predetermined payment when an event such as a natural phenomenon occurs.
They are known as ‘Cat Bonds’ and sadly such provisions are only possible in the United States. It is only in the United States that there is a developed market for the Insurance-Linked Securities (ILS).
The third possible means through which insurance companies can be insured is by allowing other companies to write their policies for them.
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Insurance Policies are written for Insurance Companies by other Insurance Companies
This is another means through which insurance companies insure themselves. They allow other insurance companies to write policies on their behalf and it is often based on some criteria agreed on between the insurance companies.
In the insurance industry, a step like this could be called Managing General Underwriters (MGU), Managing General Agents (MGA), or Delegated Underwriting. Sometimes, insurance companies could go on to purchase a policy from another company to protect themselves.
The question of who insures insurance companies can be summarized into the following:
- Self-insurance: they have a framework that is designed to insure themselves. This they do by reserving funds to cover for unexpected events and payouts
- Reinsurance companies. Reinsurance is the insurance for insurance companies and it works by the transference of portions in risk portfolios
- Securitizing risks in capital market
- Buying insurance policies from other insurance companies
While it is difficult to say for certain the modus operandi of insurance for insurers, the four (4) points above give a clue on how insurance companies insure themselves.