Legal Definitions - reassurance

The term "reassurance" in a legal or insurance context typically refers to reinsurance. Reinsurance is essentially "insurance for insurance companies." It is a practice where one insurance company (the "ceding company" or "primary insurer") transfers a portion of its risks to another insurance company (the "reinsurer"). This transfer of risk helps the primary insurer manage its exposure to large claims, diversify its risk portfolio, and maintain financial stability.

Here are some examples to illustrate how reinsurance works:

• Example 1: Catastrophic Event Protection

  Imagine a regional insurance company that primarily underwrites property insurance policies for homes located along the coast in a hurricane-prone state. If a massive hurricane were to strike, the company could face billions of dollars in claims, potentially overwhelming its financial reserves. To protect itself from such a catastrophic event, this regional insurer would purchase reinsurance. This means that if the total claims from a single event exceed a predetermined amount (e.g., $750 million), the reinsurer agrees to pay a significant portion of the claims above that threshold. This arrangement allows the primary insurer to continue operating and paying claims even after a major disaster.

  This example demonstrates reinsurance by showing how a primary insurer transfers the risk of a large-scale, high-cost event to a reinsurer, thereby protecting its own solvency and ability to meet policyholder obligations.

• Example 2: Insuring Large, Complex Projects

  Consider a medium-sized commercial insurance company that has been asked to provide coverage for the construction of a new, multi-billion dollar liquefied natural gas (LNG) terminal. The potential liabilities associated with such a project—including construction defects, environmental damage, or operational accidents—are immense. While the primary insurer is reputable, it may not have the financial capacity to bear the entire risk of a multi-billion dollar claim on its own. To manage this, the primary insurer will purchase reinsurance, transferring, for instance, 80% of the potential loss exposure to one or more reinsurers. This allows the primary insurer to offer comprehensive coverage for the project without jeopardizing its financial health.

  This illustrates reinsurance by showing how it enables primary insurers to underwrite very large, complex, and high-value risks that they might otherwise be unable to handle independently, by sharing the financial burden with a reinsurer.

• Example 3: Managing High-Value Individual Policies

  A life insurance company issues a $100 million life insurance policy to a prominent business executive. While the company is financially robust, a single payout of this magnitude could significantly impact its quarterly earnings or capital reserves. To mitigate the risk associated with this single, exceptionally large policy, the life insurance company might reinsure a substantial portion of it, perhaps transferring $90 million of the risk to a reinsurer. This means that if the executive passes away, the primary insurer would pay the first $10 million, and the reinsurer would be responsible for the remaining $90 million.

  This example demonstrates reinsurance by showing how it helps primary insurers manage individual large exposures, preventing a single, substantial claim from disproportionately affecting their financial performance and ensuring they can meet their obligations to all policyholders.