The Foundation of The Industry
Reinsurance is the practice whereby insurers transfer portions of their risk portfolios as stated in an agreement to other parties in the secondary insurance market. It is done through a legal contract to reduce insurers' risk of paying large obligations that arise from insurance claims. This process is presented as a legal transaction between two parties, namely the ceding party and the reinsurer — the former diversifies its insurance portfolio while the latter undertakes risks in exchange for insurance premiums.
Basics of the Business Model
Reinsurance companies typically offer two products that cover varying risks depending on the company's financial needs. The first is facultative reinsurance, designed to cover single or defined packages of risks in the primary insurer's business. Facultative reinsurance is usually taken by the ceding company as a supplement to a long-term reinsurance contract to diversify increasing costs and mitigate financial risk.
The second is treaty reinsurance, a broad agreement covering some portion of a particular class of business or a set of risks. Compared to facultative reinsurance, treaty reinsurance provides coverage for all risks within the terms unless specifically excluded. It does not require the insurer to review individual risks, but it demands a careful review of the underwriting practices of the ceding company.
The Customers of the Reinsurance Industry
Reinsurance companies target a very different customer base than conventional insurance companies and tend to operate under wider jurisdictions involving other legal systems. Conventional insurance companies are mainly targeted at individuals and small-scale companies, while reinsurance companies operate in the background of the financial world as it involves a huge number of financial risks and operational expenses. A reinsurance company must have underwriting, actuarial, and claims expertise to provide various services to provide coverage for large-scale industries. Some common reinsurance products are life reinsurance, agriculture reinsurance, automobile reinsurance, and property reinsurance. Given its niche and large-scale business nature, these reinsurance companies usually develop strong business ties with specific industries.
As a resilient developing economy, Malaysia also has a reinsurance industry. Malaysian Reinsurance Berhad (Malaysian Re) is Malaysia's largest reinsurer, commanding more than 60% of reinsurance accepted premiums in the country. Malaysian Re underwrites all classes of general reinsurance business and general re-takaful business. Malaysian Re is a regional and international player with an extensive portfolio of business expertise and a strong market presence in Asia and the Middle East. Head over to https://www.malaysian-re.com.my/our-solutions/reinsurance for an overview of the company’s business model.