Reinsurance – the principle of risk spreading
Reinsurance is "insurance for insurance companies”, in other words a “second level of insurance." It was not long before the risk of suffering dangerously high losses as a consequence of payments for major claims prompted a need for "reinsurance" among so-called "primary" insurers. The oldest known reinsurance contracts or "treaties" date back to the fourteenth century. The international reinsurance sector has since developed into a highly specialised financial service. Large individual risks and natural catastrophe risks are spread across the entire globe so as to minimise the potential loss for a single company. Reinsurers, for their part, purchase coverage for assumed major risks (retrocessions).
Economic role of reinsurance
Catastrophic events – whether due to natural causes or man-made – are inevitable. The worldwide reinsurance industry improves the resilience of its clients in the face of large losses by compensating those affected in the form of payments financed in advance by the entire community of insureds through their premiums. It facilitates recovery after losses have been incurred and helps to secure the livelihood of individuals and businesses. It also safeguards continued work on large-scale projects and the development of new technologies, thereby making a sustained contribution to economic growth. The industry's vast wealth of experience in risk assessment and risk management similarly assists in identifying new and emerging risks and developing appropriate risk transfer solutions. What is more, reinsurers are prudent investors with a long-term horizon who have a stabilising effect on the capital market.
Property & casualty reinsurance – the protection of material assets – and life & health reinsurance – the protection of natural persons – are the main areas of business covered by the worldwide reinsurance industry. Material assets, just like people, are exposed to wide-ranging and complex risks. The geographical spread of such risks varies, they can differ in form or structure, and they are shaped by highly diverse natural, social and legal framework conditions. All known factors are included in computational models that calculate probabilities of occurrence for potential loss scenarios on the basis of large volumes of data. Prices for reinsurance protection are determined in this way. The better the models and the data basis, the more precisely the prices can be calculated – which benefits both contracting parties. To this end, the models are subject to continuous review and recalibration.
Highly specialised products and services
In addition to the traditional business of covering risks in property & casualty and life & health reinsurance, support is provided to new insurance companies during the cost-intensive start-up phase. The goal pursued by insurance companies (especially those listed on the stock exchange) of ensuring balance sheet continuity is achieved, in part, by means of reinsurance. A further task of reinsurers is to advise insurers in underwriting, pricing and the development of new insurance products, among other things. Automated systems for consulting services or for distribution/risk assessment are also offered.
Since treaty terms and conditions are negotiated in each individual case, reinsurers have built up a very high level of expertise in risk-appropriate underwriting. To this end they need experts from highly diverse fields. The reinsurance industry today employs not only insurance specialists, but also mathematicians, meteorologists, medical experts, engineers, computer scientists etc.
Through the provision of such highly sophisticated services - the specifics of which are frequently extremely complex - Hannover Re today ranks as one of the leading reinsurance groups in the world.