Can you explain reinsurance for short term insurance?

Answer 1

Regardless of the type of insurance involved (long or short term), the essence of reinsurance is essentially the same. It can be characterized as "insurance for an insurer". It is a contract that one insurer makes with another to protect the first from a risk that it has already assumed. In retun the first (primary) insurer pays a premium to the reinsurer to assume that risk.

Stated otherwise, a reinsurance contract os one in which the reinsurer agrees to indemnify (make whole), either fully or in part, losses that it has to pay to policyholders. Those losses are paid under the original insurance contracts issued to consumers.

State insurance regulators limit the amount of insurance that an insurer can issue based, in part, upon the insurer's assets. Asset value is important to ensure that the insurer's financial stability is sufficient to pay policyholder claims as they accrue.

One of the functions of certain types of reinsurance is that it counts toward the assets of the primary insurer. Therefore, since it is considered to have additional assets consisting of the reinsurance, the primary insurer is able to issue a greater amount of insurance than it would if it has to rely solely upon its own assets.

Important to note is that for the most part, the reinsurance transaction is invisible to the insurance consumer. As such, the consumer does not have a direct right of action (claim or lawsuit) against the reinsurer; the claim is against the insurer and the insurer and reinsurer allocate responsibility between themselves. However, in rare circumstances, there exists a "cut-through" provision in reinsurance agreements that allows the consumer a direct right of action against the reinsurer.