Have you ever wondered how insurance companies are able to take on a huge amount of risks and still make money? It’s because insurers rely on a number of risk-sharing tactics to ensure that their profits are protected even when they have to pay out claims. Attorney Bill Voss explains how risk sharing protects insurers from large losses, as well as how it impacts your potential claim as a policyholder.
What Is Retrocession Insurance?
What many people do not know is that insurance companies buy insurance policies of their own, known as reinsurance. This ensures that the company will have enough money to pay out if a large number of claims come in at once.
Once the first insurance company buys insurance to protect itself from a second insurer, the reinsurer also has the option to pass on its portion of risk to a third (or fourth or fifth) company—a process called retrocession.
At this point, there are many different players in the insurance agreement:
- The Client is the person who purchases insurance coverage
- The Insurer is the initial insurance company where the client purchases the insurance
- The Reinsurer is the reinsurance company that takes on part of the risk assumed by the insurer (also referred to as the cedent)
- The Retrocessionaire is the reinsurance company that takes on part of the risk assumed by the reinsurer (also referred to as the retrocedent)
The Benefits of Retrocession Insurance
While retrocession insurance can be confusing, it is a great benefit to insurers because it adds another layer of protection to their businesses. When done correctly, retrocession reduces risk and the liability burden of the initial reinsurer by spreading out the risk to other reinsurance companies, giving your insurance company the benefit of:
- Investment profits. Insurance companies take the money they receive in premiums and invest it elsewhere, allowing them to grow their profits even further. As a result, they do not have all of their funds available at one time. Retrocession insurance allows insurers to invest their profits and still have funds available when a huge amount of claims needs to be paid out.
- Protection in at-risk markets. Retrocession is common in places that are prone to natural disasters such as hurricanes or tornados. Due to the prevalence of natural calamities, insurance companies might not thrive if they do not have access to reinsurance and retrocession.
- Client protection. If you are an insured client and your provider has reinsurance or retrocession insurance, your agreement with your insurance company is valid and binding even if the reinsurer or the retrocessionaire fails to reimburse the insurance company.
How Retrocession Insurance Can Negatively Impact Your Claim
Generally speaking, policyholders never know about retrocession insurance if the process is working properly. Once policyholders have paid premiums to an insurer, they may give little thought to where that money goes—until, of course, they experience sudden property damage and need to make a claim.
The most common ways policyholders learn about retrocession insurance include:
- Spiraling. The more insurance companies engage in buying and selling insurance products, the more likely it is that they will accidentally buy back their own products.
- Unforeseen disasters. Even if companies have purchased reinsurance and retrocession insurance, huge storms have the ability to bankrupt insurance companies or leave them scrambling to pay out claims.
- Unfair denial of claims. An insurer that failed to ensure its partners were equipped to handle a large risk could simply attempt to deny your claim rather than admit that it cannot pay.
If you are experiencing similar unfair treatment from an insurer, the insurance bad faith attorneys at the Voss Law Firm can help you fight the battles you need to fight to get the compensation you deserve from your policy. Simply fill out the contact form on this page today or order a free copy of our book, Commercial Property Owners Must Read This BEFORE Filing an Insurance Claim.