Reinsurance is an arrangement according to which an insurance company, the “reinsurer,” commits to provide compensation to an insurance company, the “insurer” for all or part of the risk under a specified group of insurance policies issued by the insurer.
Reinsurance reduces the insurer’s risk exposure and can also be a useful source of funding and actuarial experience. This practice may help to stabilise the profits and protect them against strong fluctuations in financial results from year to year. Reinsurance enables small insurers to share the risk with other operators located in other regions or abroad by pooling the risks sufficiently, as the risk is mutualised among many insurers.
One common and relatively simple type of reinsurance is stop loss, in which the reinsurer covers the total claims above an agreed value on a group of policies.
Despite the many potential advantages of reinsurance arrangements, they are often absent from microinsurance programmes. This can be due to the low involvement of reinsurers in the microinsurance space but also is reflective of the limited risk that many microinsurance policies hold (with very small claims benefits spread over large numbers), which diminish the need for reinsurance in some types of policies.
- Stéphane Bonnevay, David M. Dror, Gérard Duru & Michel Lamure. A Model of Microinsurance and Reinsurance. In Social Reinsurance A New Approach to Sustainable Community Health Financing, David M. Dror and Alexander S. Preker, 153-183. Washington, D.C.: The World Bank, 2002.