Portfolio Reinsurance

What Is Portfolio Reinsurance?

Portfolio reinsurance, otherwise called assumption reinsurance, is a type of transaction wherein one insurance company transfers a large number of its existing insurance policies to another. It is commonly employed when the company seeking portfolio reinsurance wishes to cease operating inside a specific segment of the insurance market.

How Portfolio Reinsurance Works

Insurance companies must closely monitor the profitability of their insurance contracts. On the off chance that the claims they pay reliably surpass the premiums they collect, the insurer might battle to fund its continuous operations.

One of the manners in which that companies in that situation can reduce their risk of insolvency is by shifting a portion of their policies over to other insurance companies, called reinsurers. In doing as such, the company purchasing reinsurance would pay the reinsurer a percentage of the premiums received. In exchange, the reinsurer would acknowledge responsibility for a percentage of any future claims emerging from the contract.

Portfolio reinsurance is essentially a greater variant of this fundamental transaction. Rather than reinsuring specific contracts, portfolio reinsurance includes reinsuring a large block of contracts — ordinarily with the goal of done composing such contracts from now on. For example, on the off chance that an insurance companies chooses to presently not offer [home insurance](/property holders insurance) policies, they could get portfolio reinsurance for all of their home insurance policies and afterward cease offering home insurance later on.

Real World Example of Portfolio Reinsurance

Dorothy is an entrepreneur who as of late acquired an insurance company spend significant time in home and accident coverage. After carefully exploring the firm's outstanding insurance policies, she confirms that a portion of the locales where the firm works are reliably generating unacceptable profit margins.

With an end goal to work on her firm's financial strength, Dorothy chooses to divest herself of the unprofitable contracts and cease operating in those locales. To achieve this, she haggles with several reinsurers and agrees with one of them to transfer 100% of the outstanding liabilities associated with those claims. In exchange, the reinsurer gets all of the premiums associated with those contracts from here on out.

Subsequent to completing this portfolio reinsurance transaction, Dorothy transfers generally outstanding premiums and [loss reserves](/monetary record reserves) to the reinsurer. Going ahead, no new policies will be transferred to the reinsurer, in light of the fact that none will be made. Additionally, no renewal policies will be transferred since Dorothy's firm will exit that geographic market and let their past policies lapse.

Features

• The purchaser of portfolio reinsurance gives the reinsurer the insurance premiums received from the policies being reinsured.
• Portfolio reinsurance is a type of insurance transaction including at least two insurance companies.
• In exchange, the reinsurer accepts the risk for any future claims associated with those policies.