Reinsurance Contracts, Insurer Solvency And Reinsurer Solvency - A Reinsurance Primer

Reinsurance in the simplest terms is insurance for insurance companies. Primary insurance carriers "cede" (place with) some portion of the risks they agree to underwrite (based on the design of the reinsurance contract) to a reinsurance carrier which is known as the "cedant." Primary insurers and reinsurers negotiate and re-negotiate these contracts based on market conditions, trends and loss history.

Negotiated reinsurance contracts influence the breadth of or even the limit on risks primary insurance carriers can and are willing to underwrite. The primary insurer's capacity and "appetite" is proportional to the availability and use of reinsurance: the lower the reinsurer's capacity, the lower the primary insurer's capacity; and the narrower the reinsurer's appetite, the narrower the appetite of the primary insurer.

Retrocession is reinsurance for the reinsurer. The reinsurer has agreed to take on risks from several primary insurers and they, in turn, place some of their financial risks in other reinsurance carriers. The number of insurance carriers, primary, reinsurers and retrocessionaires (the reinsurer of the reinsurer) on a block of risks may be surprising.

Reinsurance is vital to the entire insurance mechanism, especially in light of the global insurance economy. Reinsurance accomplishes five functions/goals:

1. Stabilizes the earnings of the primary insurer in the event of catastrophic losses;2. Increases the primary insurer's capacity by limiting its liability on individual risks;3. Provides liquidity and protects against swings in business cycles; 4. Provides underwriting expertise to the primary insurer; and5. Can partially protect the insured in the event of a primary insurer's insolvency.

Conclusion
Reinsurance is vital to the insurance mechanism as it exists today. Capacity and risk appetite are based on the capital provided by reinsurers and the contractual agreements between primary insurers and reinsurers.

Emerging Trends in Workers Compensation

The elephant in the room in Workers Compensation Costs is healthcare's rising costs. The two snakes hiding under the bed are aging in the workplace and obesity. Consider the following:

• In 1986 Medical costs represented 45% of Workers Compensation claims. It is projected that by 2016 Medical costs will represent 70% of claims. Remember health care costs are borne by the employer through premiums and experience mods.
• Workers over 65 median lost time is 50% more than younger workers.
• Indemnity costs are 11 times higher for obese workers than healthy weight workers.