Risk

Reinsurance and How an Exposure Gets Passed Up the Chain

See the whole chain your risk travels down — from your deductible to your carrier, its reinsurers, their retrocessionaires, and the capital markets behind them — so you can read a renewal, judge a counterparty, and structure a captive that is actually bounded.

  • Advanced
  • 13 min total
  • 14 chapters

What decision this helps you make: Whether the carrier standing behind your policy can pay, how much of your own retention needs excess cover above it, and how far up the chain you need to look before you sign.

What this topic is

Reinsurance is insurance bought by insurers. A carrier that has written more exposure than it wants to keep sells part of it to another company, which may sell part of that on again, until the risk ends up spread across dozens of balance sheets and, increasingly, across bond investors. Your policy is the first link in that chain, and almost everything about its price and its availability is decided further up it than you can see.

Why it matters

Two things you actually care about are set upstream. The first is whether the promise behind your policy is good — a carrier is only as solvent as the reinsurers it is relying on, and the failures that matter arrive when many claims land at once. The second is price: when your premium jumps in a year you had no claims, the reason is usually that reinsurance capacity got more expensive somewhere you have never heard of.

Who should learn it

Owners renewing property or liability cover in a hard market, anyone running or considering a captive, and buyers whose contracts require them to name a rated carrier and who have never asked what the rating is measuring.

What you will understand

  • The layer tower: retention, attachment point, limit, and what sits above the top
  • Proportional versus non-proportional cover, and what each one is actually for
  • Why a captive without excess cover is an uncapped exposure with paperwork
  • How to judge counterparty strength, collateral, and whether a cut-through exists

Prerequisites

Common misconception

"Reinsurance is my carrier's business, not mine." It is your carrier's business right up until it becomes yours. You have no contract with the reinsurer — the reinsurance agreement runs between two insurers and you are generally not a party to it — so if your carrier collects on your loss and then fails before paying you, the recovery sits in its estate with every other creditor. It is also the reason your renewal moved in a year when nothing about your business changed. The chain is invisible from where you sit, and it prices you anyway.