Bordereau
What Does Bordereau Mean?
A bordereau is a document produced by an insurance company that either lists information about a high-value asset—such as ownership names, contact information, and the period covered—or details claims paid for a specific risk during a given timeframe. This document is provided to a reinsurer.
A reinsurer essentially acts as the insurance company for the original insurance company. Reinsurers are utilized when the cost of paying out a particular type of claim is so high that it could bankrupt a single company. Instead, reinsurers collaborate to agree on covering a portion of the losses, thereby lessening the financial impact on the original company.
A bordereau is part of the reinsurance contract. It assumes that, since the original company has more knowledge about the risks it has transferred to the reinsurer, it is responsible for periodically updating the reinsurer about its financial status (losses incurred, premiums collected) and other pertinent information. The bordereau will either contain a comprehensive list of all items protected under the contract or a detailed record of the number of claims made for that risk during a specified period. Meanwhile, the reinsurer audits the report to inform its future decisions, such as determining which risks should be reinsured based on profitability.
An example of a risk that would be too great for a single insurance company to cover would be an earthquake. If one insurance company insured all the homes in an area that was then devastated by an earthquake, it would face bankruptcy while trying to pay out all the claims. However, the insurance company can share the responsibility of coverage with other insurance companies (reinsurers) to distribute the financial loss, ensuring the financial stability of all parties involved. This type of reinsurance is known as treaty reinsurance.
Insuranceopedia Explains Bordereau
“Bordereau” is a French word that means “border,” “slip,” or “margin.” Not every reinsurance contract includes a bordereau; sometimes, only an accounting summary is required. For example, while a bordereau would list details about a commercial building and what is covered, an accounting summary would simply provide a numerical overview of profits and losses.
The purpose of insurance is to spread the losses of the few among the many. This process works by having customers (the many) pay their insurance premiums into a single large pool. When one of the customers has a claim (the few), the insurance company uses the funds from this pool to pay out the claim. If the pool becomes depleted due to frequent claims, insurance premiums will increase. The same concept applies to reinsurance; if there is a risk that the pool will become too low, insurance companies will call on their reinsurers to share in the loss, mitigating the impact.
There are two different types of reinsurance: treaty reinsurance and facultative reinsurance. With treaty reinsurance, reinsurers may cover a specific risk associated with a group of standard policies. For example, a reinsurer may cover only the medical claims for all auto insurance policies, while another reinsurer may cover all legal expenses. In contrast, facultative reinsurance involves reinsurers sharing the risk of any claim on a particular item. For instance, a commercial building valued at many millions of dollars may be too expensive for a single company to insure, prompting them to call on their reinsurers to share the risk and potential profit for that specific building.
These reinsurers typically agree to cover only a small percentage of the losses, which is why multiple reinsurers may be involved. They benefit by participating in the profits generated from the original policy. If a claim does not occur, they can retain a portion of the premium collected on the original policy.
