Reinsurance Essay

2234 Words Dec 8th, 2010 9 Pages
The Reinsurance Market and its Role in the Lloyd’s of London

In London’s financial district there is a massive building home to a famous financial market that handles risk unlike any other place in the world. The Lloyd’s of London insurance and reinsurance market has no limit on what can be insured. Insurance policies taken out at Lloyd’s include Brooke Shield’s and Tina Turner’s legs, Rolling Stones guitarist Keith Richards’ fingers, and singer Celine Dion’s vocal cords. Therefore, if Keith Richards ever broke a finger and could no longer play the tune to “Jumpin Jack Flash” or if Celine Dion’s vocal cords were ever damaged and she could no longer sing “My Heart Will Go On,” he or she would be paid millions of dollars in
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“Even sophisticated purchasers of commercial general liability and property coverage are often only vaguely aware of the reinsurance market standing behind the companies.” (Rosenquest) Reinsurance is the concept of insurers transferring parts of the risk they have accumulated to a third party who takes on a portion of the risk in return for a payment. By doing this, the insurer has effectively reduced some of the initial risk he had and does not risk having to pay a large obligation on the claim if it has to be paid out. However; If the insurer transfers some of its risk exposure through reinsurance arrangements and/or other devices, there will be a cost associated with that transfer. This cost will comprise the expected loss or payout associated with the risk transfer and a loading that reflects the transaction costs and the reinsurers' or investors' cost of capital committed to the transfer. (Grace)

Even though the insurer lowers their risk, they have to pay a price and lose potential

future payments if the claim never has to be paid.

Insurance companies need reinsurance for a number of different reasons. One

reason for getting reinsurance is if an insurance company wants to take on a client’s

coverage, but the burden of taking on that risk is too great for that single company.

Individual companies are limited in the amount of business they can write by a variety of regulatory mechanisms intended to insure that the

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