John G
|
You betcha! This is known as -and I'm not making this up - "reinsurance." Happens all the time. Let's say your house is insured for 500,000 by Allstate. They turn around and "cede off" say 100,000 to State Farm and 200,000 to the Hartford, and keep 200K for themselves.
You have a 10,000 loss. Allstate pays you the 10K, then turns around and collects 1/5 of that from State Farm, and 2/5's from Hartford.
There are some comapnies, such as Zurich, General Re, and others, who specialize in reinsurance; that is, MOST of their business comes from just insuring other insurance.
Then, there is "Lloyd's of London," properly known as "Underwriters at Lloyds," who specialize in finding reinsurance for really tough cases, such as shipping oil in the Arabian Sea or in pirate infested waters. Lloyds doesn't actually write any coverage itself, it is just a place where underwriters hang out, look at what needs to be insured, and then write their name under the risk (which is how the term, "underwriter" came to be) together with the amount they'll cover and the price. Very electronic these days -but in its early days the place was a coffee house in London's financial district where big money types hung out.
Now you may ask -"Do the reinsurers in turn by insurance?" Sure they do, and THAT's called "retrocession." Same players as are in insurance and reinsurance.
The whole purpose of this mechanism is to spread risk and loss as much as possible, so that a big shocker, like Katrina, gets absorbed by the system as a whole. It's essential that insurance companies stay solvent and make money, so they can PAY claims. Thus, "ceding off" risks into a web of other companies provides a measure of stability.
I once wrote the coverage on the emerald brooch that Lafayette gave George Washington as a friendship. It was covered for 5 million bucks, and sat in a small safe in a place I can't tell you, but in Washington, DC. The insurance company insisted that a fake replica be placed next to it, so a thief would have to first choose WHICH one was real, then go to work extracting his 50-50 guess. Turns out the fake replica became worth 2.5 million, even though it was just glass. The premium, believe it or not, was fairly reasonable -maybe $3,000 a year- but these puppies were all over the reinsurance market, because just ONE hit and POOF -there goes 5 mil or 2.5 or maybe 7.5!
Hope this helps. |
Nick V
|
Yes. They go to "Reinsurance companies" that aggregate risk and play their accounts much like a bookie does, balancing one risk off another, opposite risk for billions.
They are as prevelent in tax friendly havens as they are in major capitals. Warren Buffet's Berkshire Hathaway is invested in some of the largest reinsurance companies in the world.
This next part is copied from Wikipedia:
"There are many reasons why an insurance company would choose to reinsure as part of its responsibility to manage a portfolio of risks for the benefit of its policyholders and investors :
Risk transfer
The main use of any insurer that might practice reinsurance is to allow the company to assume greater individual risks than its size would otherwise allow, and to protect the cedant against losses. Reinsurance allows an insurance company to offer higher limits of protection to a policyholder than its own assets would allow. If the principal insurance company can write only $10 million in limits on any given policy, it can reinsure (or cede) the amount of the limits in excess of $10 million.
Reinsurance’s highly refined uses in recent years include applications where reinsurance was used as part of a carefully planned hedge strategy.
Income smoothing
Reinsurance can help to make an insurance company’s results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage.
Surplus relief
An insurance company's writings are limited by its balance sheet (this test is known as the solvency margin). When that limit is reached, an insurer can either stop writing new business (not an option), increase its capital or buy "surplus relief" reinsurance. The latter is usually done on a quota share basis and is an efficient way of not having to turn clients away or raise additional capital.
Arbitrage
The insurance company may be motivated by arbitrage in purchasing reinsurance coverage at a lower rate than what they charge the insured for the underlying risk." |
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