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How Does Reinsurance Help a Company Reduce Financial Risks?

How Does Reinsurance Help a Company Reduce Financial Risks? | In general, reinsurance is insurance for insurance companies. It is the mechanism that insurance companies use to lower and mitigate their business risks in the face of catastrophic events that could lead to a large number of insurance claims. Insurers purchase reinsurance for main reasons such as limiting liability and losses for specific risks, providing financial security, and increasing business capacity. What are the ways that reinsurance companies help insurers to reduce their financial losses?

How Does Reinsurance Help a Company Reduce Financial Risks?
Image source: Zurich Insurance 

1. Arbitrage

Arbitrage reinsurance is a method whereby an asset is simultaneously purchased and sold in different markets to profit from short-lived price variations in the asset’s market price. You might be wondering: is it worth performing both transactions just to profit from minor price differences? In practice, reinsurers “bulk purchase” assets by bringing together a group of risks to have a greater degree of certainty about the paid claims. A reinsurer purchases single units of risk at a lower price than the premiums collected by the original insurer; hence there is a profit to be made.



2. Capital Management

Reinsurance is an effective capital and risk management tool. It provides companies with a platform to transfer a portion of their financial risks to avoid absorbing large losses and freeing up additional capital. For example, the life insurance industry faces critical challenges that are undermining business growth due to decreasing demand and an increase in pricing. Therefore, reinsurance can step in to help eliminate redundant reserves and free up domestic capital to allow for more business activities.


3. Risk Transfer

This process is facilitated by companies transferring specific risks to other companies. Reinsurance contracts contain particular limits on the amount of insurance risk assumed by the reinsurer, which can help the cedant party reduce a significant amount of financial burden. Generally, reinsurance contracts have clauses that mandate the reinsurer to take on considerable insurance risks, such as underwriting and timing risks, of the underlying insurance agreements. Besides that, the contract also states the possibility that the reinsurer may realize losses from the transaction.


 

Malaysian Reinsurance Berhad (Malaysian Re) – a wholly-owned subsidiary of MNRB Holdings Berhad – is the largest national reinsurer (by asset) in Southeast Asia. The institution has an extensive portfolio of business expertise with business connections across Asia and the Middle East. Malaysian Re underwrites all classes of general reinsurance business and general retakaful business. Discover the many reinsurance solutions that the institution offers here https://www.malaysian-re.com.my/our-solutions/reinsurance.


Bella Jamal

Hi! Bella Jamal is a part-time blog writer of Ini Adalah Bellarina Natasya. A long time ago graduated from the National University of Malaysia with a degree in Bachelor of Chemistry, now working as a Social Media Professional for Telco company. For any opportunities, can contact me at jbella8868@gmail.com

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