Thread by @joinditto

Who insurers the insurer?

A thread🧵

How do you view an insurance company?

If we had to personify him, it would probably be a middle-aged man in a modest home, collecting premiums and living his life.

But late at night, he is also troubled by the fact that someday, a flood or a pandemic could put him out of business or at least adversely affect him. But that's what you pay the premiums for, to transfer your headache onto this guy.

Now imagine another middle-aged man, but instead of taking on headaches of salaried people and small businesses, he helps the first guy sleep i.e. he insures, the insurance companies.

By taking a cut of the premiums, he takes a part of the liabilities.

This concept is called reinsurance and it is the backbone of the insurance market.

You see insurance has been transformed this last decade. The internet has made buying insurance as easy as booking a hotel and reinsurance has played a big part in making that possible.

Insurers can keep selling policies (with due diligence) and reinsurance promises to cover them in case of widespread catastrophe.

And you might be tempted to ask- "When does the reinsurer pay the insurer? Surely not on all claims?" Well, it's a bit more complicated than that, considering there are different types of reinsurance.

But to oversimplify, the basic idea is that the reinsurer gets a part of the premiums, and when those policies get claimed, they pay a part of the claim.

And the areas where reinsurance becomes essential is in the troubled insurance segments, like crop insurance for example. Here the profits are slim and risks are huge, so for the farmers to avail these benefits, reinsurance steps in.

Thus, reinsurance makes sure that people like us can buy policies easily and insurers are solvent enough to sell us those policies, leading to a healthy insurance market.

Do check out Ditto Insurance- bit.ly/3koiTh0 for more educational content on the world of insurance

*Correction: Who insures the insurer?