Reinsurance And Coinsurance: Understand The Main Differences • insuredgaurd (2024)

Doubts about what reinsurance and coinsurance have in common? It’s normal because the terms are similar and they have similar characteristics that need to be clarified.

However, it is essential to know what differentiates these two categories. Because they are seen as an essential reference for quality and safety in policies.

In addition, a customer may be curious or need to know the difference between these modalities.

Want to understand more about it? In this post, I will bring didactic and transparent information about reinsurance and coinsurance and answer all your questions. Check out!

What Is Safe?

Insurance is a contractual way of managing risks, reducing or even avoiding dire and unpredictable consequences. When purchasing insurance, you purchase protection against untold financial and personal losses.

The brokers assume responsibility for bearing damages resulting from difficult situations that everyone is exposed to daily. They either by pay the damages to the insured or someone he indicates.

For example, if a person does not have insurance and is involved in a car accident, they may be liable for all costs related to the event.

Even if you are a careful driver, you are not safe from other people’s carelessness or even fortuitous circ*mstances that appear.

Anyone who wants to bring security to the family knows it is not enough to be careful. You must be ready for any situation.

That is why brokerages have been expanding the range of options for the most diverse types of risk, intending to face adversity. They know that providing the right insurance for people’s needs is crucial to keeping them satisfied.

It is essential to clarify that security occurs through a policy. A policy is a written contract between the policyholder (the person or company that obtains the service) and the insurer (the company that offers it). The first is not necessarily the insured.

An individual or legal entity may purchase an insurance policy to protect another individual or entity (who is the insured). For example, when a company takes out life insurance for an employee, it becomes the policyholder and him the insured.

What Is Reinsurance?

Reinsurance is a contract in which an Insurer employs the services of a reinsurer to cover part of the risks of a policy.

In this case, the responsibility before the final consumer, who contracted the insurance to protect his asset, remains with the contractor.

This means that reinsurance is an independently contracted contract. Any discrepancy, billing, support, or need involving the contracting client will be the insurer’s responsibility. She will be the one to contact the reinsurer independently.

Reinsurance is a way insurance companies make more money.

What Are The Functions Of Reinsurance?

In recent years, the use of reinsurance has grown considerably, guaranteeing insurers a higher level of protection in their services. Some of the most popular applications are:

Protection against catastrophes

Regardless of how well-managed an insurance portfolio is, there is always a chance that some unexpected event will occur.

And, in case of catastrophes, this can directly compromise the insurance portfolio, considerably reducing its profitability and return.

A catastrophic event is a circ*mstance that can trigger a large number of insurance policies at once, causing a large-scale outflow of insurer resources. When this happens, insurers may need more cash to pay all customers.

With reinsurance, you can protect yourself against potentially more severe losses. This factor makes all the difference when determining whether your business will remain balanced or fall into the red.

Greater risk absorption

In any Insurer, the risk of a claim is one of the main factors to be considered when stipulating the value of insurance.

The greater the risk and cost, the more the customer must include in their payment so that the benefit is guaranteed without difficulties. The risk leads to a considerable loss of resources.

‍ Understanding what reinsurance is and using it to maximize your margin of safety in each job is essential to minimize your losses in the event of an accident.

Greater stability for insurance portfolios

Keeping the insurer less exposed to high risks is a way to balance the potential losses involved in the service and still offer good customer coverage.

The smaller your margin of safety when dealing with insurance portfolios, the more customers need to be turned away to ensure current ones are still well served.

By using insurance, the portfolio also acquires more stability and security. Thus, preventing inevitable fluctuations or changes in risk from causing significant changes to the contract or leading to more significant losses on your part.

In any insurance service, the norm is to try to spread the risks so that the chances of triggering the insurance are as minimal as possible. With reinsurance, even if there is still a risk of being triggered, the possibility of injury is considerably lower.

What Are Some Standard Reinsurance Terms?

There are terms in everyday use that help to understand what reinsurance is. Some of the main ones are:

• Capacity: risk limit that an Insurer is willing to absorb at the moment;

• Cession: the total value of the reinsurer;

• Cadent company: the insurer that takes out reinsurance;

• Transferee company: the insurer that assigns the reinsurance;

• Technical limit: the maximum limit can be absorbed in each risk, and the excess must be mandatorily reinsured.

What Is Coinsurance?

The prefix “co”, present in coinsurance, means joint participation. This means that when we say “co-participant”, we mean a second person or entity participating in something with another.

Therefore, coinsurance is a type of insurance in which more than one insurer is involved in the contract.

Typically, this contracting model is used for large insurance, in which it is necessary or advantageous for several insurers to assume the risk jointly.

In some cases, several policies are used, each of which is assumed by a different insurer. In other situations, one is responsible for administering the contract and a single policy. But the individual obligations continue in case of need for compensation.

What Are The Differences Between Coinsurance And Reinsurance?

The first significant difference between the reinsurance and coinsurance modalities is that the former occurs without the express authorization of the final consumer.

Coinsurance, on the other hand, is signed with full awareness on the part of the primary contractor that a group of companies is cooperating to guarantee the contract.

‍The concept of risk is fundamental to understanding the essence of these differences since insurance is a contract made to eliminate its effects.

That is, instead of a person or company assuming the risks of ownership of an asset alone, several of them come together in a policy.

It is possible to determine how many groups will need to be compensated in a given period through actuarial calculations.

This number is calculated, including the fees of the service providers involved, such as Brokers, Insurers, Co-insurers and Reinsurers, and divided by the number of contractors.

What Is An Assignment?

The so-called reinsurance assignment occurs when the insurer delivers a portion of a specific risk or a portfolio of risks to a reinsurer and, consequently, a part of the responsibility it assumed in the contracts entered into.

What Is Retrocession?

Just as the insurer can protect itself through assignment, the reinsurer also has instruments to protect its assets.

One of them is retrocession, in which a portion of the assumed responsibilities is transferred to another reinsurer.

That is, just as the insurer assigned the risks and benefits of its insurance to the reinsured. The latter also assigns them to a new company.

What Are The Differences Between Assignment And Retrocession?

In both contractual operations, there is no direct link between the insured and the reinsurer. Thus, when the accident occurs, that is, the materialization of the risk, the original insurer will be fully liable for the commitments assumed in relation to the contracting party. ‍ ‍

There are several reasons why an insurance company divides part of its business with another company. Risk spraying guarantees confidence in the results and more stability.

The more protected from a financial point of view, the greater the ability to assume other risks, expand the business and consolidate a brand.

In this context, coinsurance is essential to enable large contracts and maintain the insurer’s financial health. Imagine, for example, the effects of having to pay insurance for a major oil company.

In some cases, the values ​​are so astronomical that they would certainly lead the insurer to a complex financial situation. At the same time, reinsurance plays a similar role in risk, which is much lower when divided.

The greater the number of policyholders, the smaller the margin of error in the actuarial calculation, which can use statistics to its advantage.

In conclusion, now that you know what reinsurance and coinsurance are. It is clear how important it is to have a good plan. Definitions are essential to maintain this quality precisely because of the role they play in reducing risks.