Mutual Insurance Company

and finance Allah shmoop What is re insurance Oh all

right people When life takes a swing at you you'll

be glad you bet against yourself with insurance Did you

get into a car accident Well good thing you bet

that you would Now you get a car insurance payout

in the hospital while you won your own bed against

yourself Because you win a health insurance payout Well the

insurance industry makes these bats with us They bet you'll

be fine I'll collect those premiums In the meantime thank

you While you're betting my life is a dangerous place

and I'm a mere mortal meat bag from individuals to

companies insurance seems available for well pretty much anyone to

buy to bet against themselves Everyone except the insurance company

Pretty much But who Insurers Insurance companies How can we

trust that they'll be there with our payouts when we

need them What if they go under because other people's

payouts made their funds run dry while the answer insurance

companies ensure each other i e They deploy reinsurance insurance

companies cover themselves by covering each other That's reinsurance That's

what it is You might have thought Insurance companies air

all competitors enemies to each other But in fact they're

more like frenemies Who coop it Tate Take Ricky's insurance

company right here This guy They cover a lot of

people's homes in case of an earthquake Well guess what

When the earthquake struck Ricky's insurance company got lucky It

was big enough and that was making enough money from

investing all those monthly premiums to make the promised payouts

to the quake stricken homeowners And when it was time

there was only a few $1,000,000 worth of damage and

that was it Ricky took on all of that risk

is an insurance company and ended up well basically dodging

a bullet But just down the road Ricky's brethren Romans

didn't fare so well Roman's insurance company also in the

quake insurance biz had to make a big payouts after

the town was shaken not stirred Romans insurance company insured

300 freestanding homes all of which were left completely decimated

Now Romans and Wells left with a cool $382,000,000 to

pay out and they don't have that money on hand

right Romans had no choice but to close up shop

in declare bankruptcy leaving all those homeowners with quake and

shake insurance from Romans Insurance Company up this creek While

this situation is obviously not so great for Roman it's

also not so great for the entire insurance industry either

How can people be sure their insurance company will be

there to pay when they need them to pay well

without a guaranteed payout as agreed upon in the initial

insurance contract during the insurance time of need it becomes

too risky for your average Joe to be paying monthly

premiums What's the point of paying every month if you're

not even sure your insurance company will be there to

cover you when you need him Alas a new era

was born in the insurance industry Insurance companies banded together

Is frenemies spreading risk among themselves keeping each other and

therefore their whole industry afloat People no longer had to

worry about being left high and dry by their insurance

company because like them their insurance company was insured more

left So in order to manage the risk of complete

company death the world of reinsurance began to be a

thing in the reinsurance biz There's the seeded company this

thing the one getting insured seeding the dough and the

reinsurer the one taking on some risk for the other

insurance company Well as with your insurance your insurance company

if they're reinsured pays premiums to the reinsurance company in

exchange for a come rescue me when I need you

Ticket Well there are two main types of reinsurance contracts

Treaty reinsurance and faculty tive Reinsurance Yeah say that three

times Fast Treaty reinsurance is more broad covering an area

of an insurance company's risk For instance treaty insurance might

cover a company's earthquake insurance contracts but not flood and

or fire While treaty reinsurance is more general insurance for

insurance companies faculty tive reinsurance is the emergency insurance It's

pretty specific covering more unusual situations that might occur like

Martian happenings or huge earthquakes or ah Noah like flood

faculty tive reinsurance is there to cover everything that treaty

reinsurance doesn't When the you know what hits the fan

how do insurance companies ensure each other There are different

types of reinsurance for instance proportional and none proportional those

air two types proportional reinsurance means the reinsurer agrees to

cover a percentage of an insurance policy For instance Ricky's

insurance company could have agreed to be a reinsurer for

Romans insurance company for earthquake insurance is up to 70%

of the damages We'll that would also mean Ricky's insurance

company gets some of the premium payments from Romans insurance

company non proportional reinsurance on ly kicks in once the

seeding company company paying out the dough in premiums passes

a retention limit For instance Romans could buy reinsurance from

Ricky's which would cover claims over $10,000,000 add up to

like $100,000,000 Romans would be responsible for covering the 1st

10,000,000 on its own but would get some help from

Ricky's if claims were larger than 10,000,000 bucks Ricky's will

cover all claims after the 10,000,000 mark But well they

stopped short of 100,000,000 mark because hey they aren't made

of money Any earthquake claims exceeding 100,000,000 mark would be

back on Romans They're also rules that re insurers can

apply the contracts each called basis like risks attaching basis

and losses occurring basis risks attaching basis means claims can

be made later after the reinsurance contract has expired Will

the event that led to the claim needs to have

happened within the contracts time frame But the insurance claim

from that event can happen later And the reinsurer well

they just need to pay up well For instance let's

say Randy a homeowner with earthquake insurance covered by Romans

Insurance Company was on vacation when the quake was a

shaken well Ricky's was covering Romans on a proportional earthquake

contract Randy came home to find his house well gone

making his claim much later than everyone else is In

the meantime you have quite reinsurance contract between Ricky's and

Romans expired Ricky's would still have to cover Randy via

Romans insurance company at the agreed upon percentage in the

now expired contract since the earthquake happened when the contract

was still a thing but only if the reinsurance had

a risks attaching basis That's the only way they get

paid legally Losses occurring basis is kind of the opposite

where all claims during the reinsurance contract period are covered

If the earthquake contract between Ricky's and Romans was on

a losses occurring basis well then it means Romans would

have to cover Randy on its own without the help

of Ricky's A loss is occurring bases reinsurance structure means

that only claims during the contract period or covered making

the reinsurer not responsible for anything once it's expired So

yeah once insurance companies finally sat down on the table

together they began making all kinds of reinsurance deals All

of the seeding insurance companies went cover themselves so they

can remain solvent in the long run And all of

the insurer insurance companies want to make sure they aren't

taking on too much risk Some insurance companies find themselves

on both sides sometimes as the seeding company and sometimes

as the insurer That being said there are specialised re

insurance companies companies that on Lian sure other insurance companies

So yeah that's reinsurance for Ricky's and Romans It's sort

of in I've got your back Jack You've got mine

Situation comes in handy when one of them has an 00:07:28.521 --> [endTime] itch Yeah