Rate On Line
Categories: Metrics
There’s insurance. And then there’s reinsurance: insurance for insurance companies. If you want your insurance company to be able to cover you when the next Katrina hits, you’d better hope they have reinsurance.
Rate on the line (ROLF...er, just ROL...nothing funny to see here) is a reinsurance thing. It’s the premium the insurance company is paying to its insurer, divided by the coverage. The rate on the line is how much an insurance company needs to pay for their reinsurance coverage to kick into gear. The higher the ROL, the more the insurance company has to pay upfront before they get any coverage.
Say there was a giant caramel spill that cost $10 million in liabilities for Insuraconda insurance co. They’ve been paying their reinsurer $2 million in premiums. The rate on the line would be 1:5, or 20%. That’s a lot of caramel.
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Finance: What is reinsurance?7 Views
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