If you have not explored reinsurance as a compliant, popular and flexible risk management strategy for you and your companies, we are here to highlight benefits of this great model as we talk to our 500+ clients in 30 US states frequently. Read on.
15 Benefits of Reinsurance
Now you that you've read 'What is Reinsurance' and 'How to Launch a Reinsurance Company', you may still be evaluating the upsides and direct (and indirect) benefits. At Reinsurance Specialties™, we strive to help business leaders understand all dynamics of these popular structures; business leaders respond with an enthusiastic 'THANKS' as reinsurance can be a valued instrument in the wake of regulatory change, legal exposures, bankruptcy and/or significant market volatility. Beyond a major safety net, reinsurance has many other benefits. Below is an attempt to communicate our top 15 benefits and why they matter.
1. Reinsurance covers uninsured risks and under-insured risks
The main benefit of reinsurance is to protect a business leader's company or group of LLCs and C-Corps. Consider that traditional P&C insurance companies are currently a) raising premiums in vulnerable areas from cyber-crime to extreme weather conditions; 'de-listing' risk from their policies (fire, flood, etc.). Reinsurance complements commercial P&C policies and strengthens the business leader's foundation giving them confidence to take on more risk and offer their services/products to even more customers.
2. Reinsurance can reduce the burden of expensive premium:
When business leader's have their 'hands on both levers' (mitigating business risks, adjudicating claims via their commercial P&C insurance and their self-owned insurance company), they often self-insure risks while raising deductibility/lowering premium on the commercial P&C side.
3. Reinsurance companies give invaluable advice and counsel:
When an individual needs insurance advice they can turn to an insurance company. But in case of an insurance firm which is new in business or hasn’t yet grown into a big organization; where can they go for advice? They can get sound insurance advice from reinsurance companies.
4. It safeguards from natural calamities and other disasters
At times, when a natural disaster or any other calamities strike, many of the policy holders will claim their policies. In order to pay many policy holders, it is quite likely that an insurance company might go bankrupt. In such scenarios, reinsurance can help reduce the financial stress on the insurer.
5. Provides stability during financial stress:
Even though, an insurance company is capable of paying a large number of claims made in a short period of time, paying out all of those claims may leave it in a dire financial situation and extremely unstable. Reinsurance helps keep insurance companies afloat during these troubling times.
6. Reinsurance stabilizes the cost of premium:
Reinsurance helps in stabilizing rates of premium. Usually, the premium rates are calculated on the basis of the losses experienced by the insurer in the past, due to the associated risk. Reinsurance takes all the previous risks into consideration and fixes the premium rate according to various types of risks under mutual agreement. Which results in stabilizing of premium rates.
7. Reinsurance reduces competition among insurers:
As insurance companies rely on each other to minimize their risk, this cooperation leads to goodwill among each other in the industry. Henceforth, reinsurance helps to control competition and boost the morale of the employees in the insurance business.
8. Reinsurance helps in stabilizing profits:
Reinsurance stabilizes a company in all dimensions including profits earned by the insurance company. However, if the bigger risks are still retained by the original insurer, their profits can greatly suffer by big claims.
9. Reinsurance reduces the number of insurance policies a client needs to buy:
To enumerate, if a client wants to insure a very expensive property against any calamities and no individual company is capable of taking on such huge risk. In such a scenario, the client would have to approach multiple insurance companies on his own and enter into various individual insurance agreements on the same property. This involves considerable cost; loss of valuable time and it slows down the pace of protection cover.
Reinsurance helps the client avoid so many deals and he is required to buy only one policy from only one insurance company.
10. Reinsurance safeguards the Insurance funds:
The insurance funds of the insurer are well protected due to reinsurance. Additional security and peace of mind is an added advantage of reinsurance for the insurer and the company that offers the insurance.
11. Reinsurance is good for insurance business:
The biggest benefit of reinsurance is that it aids in the upliftment of insurance business. It enables every insurer to strengthen their insurance business as the total risk will be distributed among other reinsurers.
12. It’s a valuable investment:
Who better understands the value of insurance than the insurance companies themselves. Thus, insurance companies intuitively understand the importance of investing in insuring themselves and their reputation.
Summary
After studying the benefits of reinsurance one can understand the significant role reinsurance plays in bringing stability to an Insurance company as well as the overall insurance industry. To put it differently, reinsurance is the backbone of the insurance industry which keeps it from falling apart even though when the world is falling apart.
If you need further guidance on how to avail reinsurance services, you can get in touch with the renowned reinsurance brokers Life & General, an insurance consulting firm in Pune. We will guide you towards finding the right insurance policy based on your needs. We are a team of experienced professionals, who are well versed with the complexities of the insurance business. For an appointment with us, fill out this enquiry form.
What’s Covered?
Often, a business leader's reinsurance company reflects business risks which are uninsured or under-insured not currently covered by business owner's commercial P&C provider). Examples can include:
Business Interruption (domestic terrorism or pandemic)
Gap fillers
Deductible layers
Cyber risks
Directors & Officers
Intellectual property
Errors and Omissions
Warranties
Malpractice
Legislative risks
Reputational risks
Keyman
Loss of Key Client/Customer
Loss of Key Vendor
Legal Risks
Regulatory risks
What Industries?
While 90% of franchise automobile dealers have successfully used reinsurance since the 1970s, ANY business which has risks (which is all of them) should explore this powerful and flexible business tool signed into law by congress and President Ronald Reagan in 1986. There is a reason 92% of Fortune 500 companies use some sort of captive and more than 70,000 middle-market business have adopted a resinurance strategy. Industries which typically participate include:
Agriculture and Agribusiness
Automobile
Aviation and Aerospace
Construction
Law Firms
Health/Medicine
Hospitality & Restaurants
Manufacturing
Medical and Dentistry
Oil & Gas/Energy
Real Estate and Development
Retail and e-Commerce
Technology
Transportation
...many more
What Are Next Steps?
If you can meet the above requirements, Reinsurance might be a good choice for you. If you do your research, you will find that due to their popularity and the subsequent abuse, this structure came under scrutiny by the IRS due to some non-compliant structures (notable cases were prevalent in 2016). Since associated tax-advantaged benefits and asset protections are significant, it’s been oversold by select accountants, wealth managers, financial planners and the like, often without meeting the requirements listed above (e.g., not using a licensed, third-party actuarial assessment to correctly identify valid risk exposures).
It’s vital that you reach out to a seasoned resource and subject-matter-expert representing a legitimate service provider - preferably one with a team of experienced professionals, hundreds of established clients and decades of IRS approval letters/positive testimonials within the industry. These proven and compliant providers will help determine your eligibility and discuss how to proceed.
To learn more about setting up a reinsurance company, contact us today. At Reinsurance Specialties™, we help business leaders mitigate business risks, adjudicate claims, protect assets and build wealth through tax-advantaged insurance products.