What Does Reinsurance Broker Mean?
Put simply, a reinsurance broker functions similarly to an insurance broker, but instead of working with the general public to sell insurance, reinsurance brokers collaborate with insurers to sell reinsurance.
A reinsurance broker acts as an intermediary, either as an individual or a firm, and is compensated with a fee or commission for securing and placing new business on behalf of both the insurer and the insured client. Their role involves negotiating rates or contracts and finding the most suitable reinsurance policies available in the market.
In the context of reinsurance, the insured client is an insurance company seeking protection, or reinsurance, from a larger insurance company to cover specific risks or a class of risks.
Insurers typically purchase reinsurance for several reasons, including:
- Limiting liability on a particular risk.
- Stabilizing their losses.
- Protecting themselves against catastrophic events.
- Freeing up cash flow.
- Offering more diverse coverage.
- Increasing their capacity to take on new clients.
When multiple insurance companies buy reinsurance from the same reinsurer, they share the risk, thereby limiting their own potential losses in the event of a disaster or specific incident. Reinsurance brokers use their extensive knowledge of the current reinsurance market to recommend policies that offer the best coverage for potential losses at the most competitive premiums.
Insuranceopedia Explains Reinsurance Broker
The process of purchasing reinsurance can be time-consuming and complex, which is why many insurance companies rely on the expertise of reinsurance brokers. These brokers possess specialized skills that enable them to secure the best deals while providing comprehensive support both before and after the sale.
Reinsurance brokers assist insurance companies in placing risk and selecting the most suitable reinsurer by thoroughly reviewing all relevant information about contracts and premiums.
Several types of reinsurance policies are available:
- Quota Share Reinsurance: Under this arrangement, the insurer and reinsurer share a percentage of the premiums and losses on a risk.
- Surplus Reinsurance: In this type of contract, the reinsurer agrees to insure a fixed amount on a policy (for example, $20M of a $50M liability policy).
- Excess of Loss Reinsurance: The insurer retains the first portion of a loss and cedes the rest. For instance, the reinsurer may be responsible for losses exceeding $10M.
- Facultative Reinsurance: This contract covers all or part of a policy on a case-by-case basis, typically arranged for large risks through one-off contracts.
After placing the contracts, the reinsurance broker continues to provide advice, draft new contracts, collect payments, and assist with claims. They also help manage the reporting of liabilities and closing of open claims once the contract ends.
These services are exclusively offered to insurance companies, who, in turn, provide advice to individual policyholders. Reinsurance brokers do not have direct interactions with individual policyholders. In fact, most people are unaware that reinsurance is involved in their insurance policies.
