Understanding reinsurance

‘Reinsurance’ is a word you may hear after major events or in a breakdown of the key factors which make up your premium. Did you know that reinsurance has an effect on how much your insurance costs? Here’s some information to help you understand what is meant by the term.

What is reinsurance?

Reinsurance is insurance for insurance companies. An insurance company takes out its own set of insurance policies in order to protect itself against the financial implications of one-off major events, like flooding, cyclones or earthquakes. Events like these can affect large numbers of customers and cost an insurance company billions of dollars in claims.

When this type of event occurs, the insurance provider can recover part or all of an insurance payout from their reinsurer. The additional financial cover helps make sure there are enough funds available to pay customers’ insurance claims and reduces the risk of an insurance company falling into financial difficulty as the result of a major event.

As such, part of every customer’s insurance premium goes towards covering your insurance provider’s reinsurance. As the number and costs of weather events and natural disasters increases, so does the cost of reinsurance and, therefore, the amount of premium charged to customers.

An example of reinsurance

An earthquake has caused significant damage on the west coast of the South Island, where a number of AA Insurance customers live. The total cost to repair or rebuild our customers’ property is close to a billion dollars. Thanks to our reinsurance policy, we can recover some of the costs we have incurred to repair and rebuild, which, in turn, enables us to pay our customers’ claims and help them recover from the damage.

Reinsurance cover contributed to most of the total funding for property-related losses from the Canterbury earthquakes. The remainder was met by Toka Tū Ake EQC and private insurers. Toka Tū Ake EQC also relies heavily on reinsurance to cover a significant proportion of its residential insurance claims.

Key takeaways

Reinsurance is when an insurance company takes out insurance policies with other insurers. This limits their own losses in case of large-scale events, such as natural disasters, and seeks to prevent insurance companies from falling into financial difficulty due to one event. This, in turn, ensures they are able to replace or repair the damage experienced by their customers.