What re-insurance does to stabilise a country's economy

The insurance and re-insurance markets are evolving in an unpredictable world of new risks, either under-estimated or just dynamic and challenging to model.

We have witnessed rising costs of claims since the onset of the Covid-19 pandemic. The world is now bogged down by skyrocketing global inflation that no one knows its end. As risks and costs of insurance rise, insurers look for other entities to shoulder these burdens. This is where re-insurance comes into play - still not well understood but is a major element.

Re-insurance, at its core, is transferring risks and spreading risks that are consistent or are supported by the theory of insurance. Insurance is concerned with spreading risks, especially when policyholders pool their peril of loss and transfer them to insurance companies.

The insurance company accepting the potential loss charges premiums based on the probability of risks of loss.

The way policyholders spread risks of loss by buying insurance, is how an insurance company spreads those risks for policyholders to reinsurers in exchange for a share of premiums received from its policyholders. In other words, insurance companies accept risks from customers and then pass them to someone else known as a reinsurer at a fee.

Kenya Reinsurance Corporation, or Kenya Re, is a perfect example of re-insurance. It has operated in the re-insurance space longer than its peers. It currently provides re-insurance to over 480 companies in more than 80 countries.

Kenya Re is also listed in the Nairobi Securities Exchange (NSE) with 60 per cent shareholding by the government, while 40 per cent is held by private investors. Kenya Re also operates three subsidiaries in Uganda, Zambia, and Côte d`Ivoire besides Kenya.

My interactions with individuals within the insurance and re-insurance spaces have compelled me to believe that the re-insurance model is interesting.

First, re-insurance makes risks bearable - insuring many homes, vehicles, businesses and other properties against damages or loss is a huge risk, especially when there is a high probability of losses.

Secondly, re-insurance expands capacity by reducing the risks of insolvency, allowing an insurance company to accommodate more policyholders.

In other words, re-insurance allows an insurance company to write more business using the re-insurer’s capital in lieu of the insurer pumping in additional capital to accommodate more risks as per the regulatory requirements.

Thirdly re-insurance helps stabilise losses. It means that though an insurance company can pay all claims within a short period, such a scenario can lead to an inimical financial situation and instability.

Finally, reinsurance helps in risk advisory and technical resource building. A re-insurance company has highly qualified and seasoned personnel with global experience in territorial scope which helps them cluster and treats risks with utmost precision.

The writer is acting Managing Director of Kenya Reinsurance Corporation

The Standard
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