Do you ever wonder why your mutual buys reinsurance? It is probably your company’s single largest expense. So why do you buy it? Here are a few reasons we all buy reinsurance.
HAVE TO: STATUTORY/REGULATORY REQUIREMENTS
Most states have state statutes and regulations that require mutual companies to purchase reinsurance protection.
NEED TO: RISK MANAGEMENT AND FINANCIAL CONCERNS
Capacity
Reinsurance provides mutual companies the ability to write a large single risk. Each mutual company has a retention (i.e. deductible) that represents the company’s share of a claim on each individual risk. The reinsurance contract provides the company with the additional capacity to write a larger risk than the mutual might be willing to take on its own.
Reinsurance protects against concentration of exposure. When the mutual writes a large farm, there is a lot of risk at one location. By having a per risk retention, the mutuals potential exposure at that location is limited.
A mutual’s premium to surplus ratio is a measure of the strength of the company. Buying reinsurance helps manage this ratio because the premium used is the company’s net premium (after reinsurance). Lower net premium improves this ratio.
Catastrophe
Reinsurance provides “CAT Protection.” Mutuals all have an Aggregate Excess contract that at a certain point of net loss the reinsurance contract will kick in and take over the losses for the rest of the year. This contract is also known as Stop Loss coverage. For larger companies, there is also an actual CAT layer that is available covering a specific event within a certain period of time, generally a 96 hour window.
Financial Security
Your Aggregate Excess/Stop Loss contract protects the company’s policyholder surplus. The Per Risk coverage limits the out-of-pocket loss on an individual loss, thereby protecting cash flow. Mutuals can also purchase Pro Rata coverage (Surplus, Quota Share) that will pay portions of each loss from dollar one.
In addition, the ability to collect on your reinsurance program either from a single loss or a catastrophe may keep you from tapping into your investments.
It is also important to note if you purchase any type of Pro Rata coverage your reinsurance shares in the Unearned Premium on a proportionate basis.
Stability
With the use of a Surplus program or Facultative Excess program the mutual is able to limit the size of each risk, providing a maximum exposure to the company on each and every risk.
The mutual’s contract with WRC has a delayed rating. Therefore the manager knows going into the year what percent the company’s reinsurance premium is going to be, which is useful for budgeting purposes. In addition, the mutual also knows at what point their specific Aggregate kicks in. This allows WRC to do a pro forma that will project an estimated maximum loss to surplus.
Reinsurance will take care of any large individual claims or accumulation of claims in a year. This will effectively level your loss experience and smooth out your financial results.
WANT TO: PEACE OF MIND
When managing the risks of the company, management and the board of directors use reinsurance to protect the surplus and assets of the company as part of fulfilling their fiduciary responsibility.
Reinsurance is a manager’s “let you sleep at night” medicine. The company can rest assured that no matter how bad the year was, the Aggregate Excess contract will kick in at a predetermined point and take over losses for the rest of the year, protecting surplus and limiting the impact of extraordinary losses.
In addition to getting reinsurance protection, the mutual also benefits from additional services and support from WRC as well as access to other insurance products the company is not able to write.
Some of the additional services and support you receive are:
Services
- Loss prevention and claims control assistance
- Underwriting assistance
- Medicare Reporting
- Rate analysis
- Subrogation and fraud assistance
- CAT Modeling
- Educational seminars
- Forms and manuals
- Training manuals
- Management needs
Product Support
- Standard Programs
- Commercial Programs
- Specialty Programs
- Assist in New Product Development
Direct Lines Available from 1st Auto & Casualty at a Preferred Rate
- Personal Automobile
- Business Automobile
- Umbrella
- Personal Liability
There are many reasons we all buy reinsurance. WRC is no different than any of our mutual clients. We also purchase reinsurance to protect surplus and limit exposures. I tell companies all the time that you need to buy reinsurance for the bad days, when all heck breaks loose. You want to make sure that your surplus is protected. That’s the bottom line. The services, product support and access to direct product lines is value added when purchasing reinsurance from WRC.
In the end, your mutual is not much different from the insurance you provide your customers. Insureds are buying protection for when the worst happens. I hope to never use my homeowners insurance but it’s nice to have the peace of mind that I have the coverage if something happens. I’m more than happy to just pay my premiums and not have the loss. I feel the same about reinsurance. I’m more than happy for WRC to pay its reinsurance premium and not have to collect. But I know it’s there when I need it.