Natural disasters have the potential to cause millions of dollars in claims payouts from insurance companies. Most insurance companies would be unable to make such large payouts if it weren’t for reinsurance. Reinsurance is like insurance for insurance companies. It allows insurance companies to pass on the risk of large payouts to other insurers in exchange for part of the premium they receive from policyholders. Commercial insurance attorneys frequently witness firsthand the effect reinsurance has on insurance claims.
Why Do Insurance Companies Need Reinsurance?
By law, insurance companies are required to have enough capital in their reserves to pay all potential claims. This protects policyholders from not receiving payouts if an insurance company becomes insolvent. For example, if an insurance company receives $50 million in premiums from policyholders in a year, but a natural disaster comes and causes $100 million in covered damages, the insurance company may not have enough money to pay out on all the claims. To prevent this, insurance companies will mitigate their risks through reinsurance. When insurance companies utilize reinsurance to mitigate their risks, they are also lowering the amount of capital they are required to have in their reserves.
What Is A Reinsurance Treaty?
A reinsurance treaty is like an insurance policy between insurance companies. The original insurance company contracts under a treaty with the reinsuring company for it to cover a particular type of risk in a group of policies. The original insurance company cedes the risk to a reinsurer and will share the premiums it receives from its own policyholders with them. In turn, the reinsurer will pay out on claims against the original insurer that involve that particular type of risk.
What Is A Reinsurance Bordereau?
An initial reinsurance bordereau is a detailed report to the reinsurer on the premiums ceded from each of the underlying policies. Typically, it includes basic details about each policy including the gross premium and ceded premium. This is how the reinsurer initially finds out the details of the policies they are reinsuring. Bordereaux are usually required periodically under a reinsurance treaty. In this case, they are frequently monthly or quarterly reports of premiums and losses. A loss bordereau will contain details of claims on reinsured policies and any paid-out losses or expenses.
Limitations Placed On Reinsurance
Insurance companies are regulated by the state (or commonwealth in the case of Puerto Rico) governments where they do business. Each state can put limits on how much risk an insurer can cede, but it often is a very high percentage. The Office of the Insurance Commissioner (OIC) of each state can require extra approval for insurance companies to reinsure more than a certain amount of risk. For example, in Puerto Rico an insurer can cede the total or partof their risk, but a domestic insurer needs written authorization from the OIC to cede more than 75%. Various states have similar rules on whether an insurer can cede all or part of its risk to other insurers. Similarly, states and territories may place restrictions on whether an insurer may reflect proceeds due from a reinsurer as an asset on the insurer’s balance sheet, and these limitations are important when insurers calculate their compliance with capitalization rules.
Commercial Insurance Attorneys
The use of reinsurance can complicate the insurance process. Regardless of whether an insurance company has a reinsurance policy, policyholders are entitled to complete protection under their policies. If your insurance company has delayed, underpaid, or denied your insurance claim, contact the commercial insurance attorneys at Raizner Slania LLP today for a free consultation to discuss your case. We have experience dealing with the largest insurance companies in the world and our commercial insurance attorneys can make sure you get what you are rightfully entitled to under your policy.