A Crash Course in Reinsurance

by | Jan 7, 2018 | CPCU 500, CPCU 520, CPCU 530

Several of the CPCU® textbooks make reference to reinsurance without clearly explaining what that is. The only course that gives a detailed explanation is CPCU 520, but even then, they make references to reinsurance before the reinsurance chapter. If you don’t work for a reinsurance company or deal with them as part of your job, you may be at a disadvantage as you won’t fully understand what the textbook is discussing. As such, this tip is designed to give you a basic but sufficient explanation.

Reinsurance is a type of insurance that only insurance companies buy, allowing them to get reimbursed for the claim payouts they make. The insurance company buying the policy is usually called the primary insurer, whereas the reinsurance company is referred to as the reinsurer.  For example, let’s say ABC Auto Insurance buys a reinsurance policy through XYZ Reinsurer for all collision exposures. That means, if one of ABC Auto’s insureds makes a claim for a collision loss and gets paid out, ABC Auto can then make a claim with XYZ to get paid back for the amount of the claim.

At first, this may seem like an odd & unnecessarily complicated arrangement, but there are all kinds of situations where reinsurance makes sense. For example, let’s say XYZ has the financial means to underwrite auto policies but they aren’t really good with marketing or dealing directly with consumers. With reinsurance, ABC Auto can be the company that consumers deal with & handle all the customer service while XYZ does the financial backing. Or, let’s say ABC Auto has enough financial means to underwrite auto policies with up to $25,000 of liability coverage on their own, but they don’t have  enough capital to underwrite for higher limits. To be a competitive auto insurance company, ABC Auto has to be able to offer a wide variety of policy limits includes ones that are much higher than $25,000, so ABC Auto can get a reinsurance policy with XYZ to kick in any time ABC has to pay out more than $25,000.

These examples will help you grasp the concept of reinsurance & its benefits enough to understand what the CPCU textbooks are talking about whenever they make reference to it.

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