Cyber Risk in Reinsurance
February 12, 2025
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The insurance industry is a large and diversified industry. It has several different types of products and operates in multiple geographies. This means that the risks on the balance sheet of the insurance company can be quite diversified. This means that a reinsurance company is also exposed to a lot of variety when it comes to products whose risks they assume. It is common for insurance companies to bundle their various risks so that the size of the underlying risk becomes large enough to gather interest from reinsurance companies.
In this article, we will have a closer look at what is bundling insurance exposures while obtaining reinsurance. We will also have a closer look at the two main types of reinsurance bundling which is commonly used by reinsurance companies.
Reinsurance companies are not like regular insurance companies. They do not deal with individual customers. Instead, they deal in bulk. Hence, reinsurance companies are only interested in providing cover and undertaking a risk if there are significant volumes involved. This is often because the transaction costs involved in the process are so large that they make offering small coverage unviable.
Reinsurance companies will typically not offer coverage below a certain dollar amount. Even if they do offer coverage, the cost of coverage tends to reduce exponentially as the dollar amount of the underlying risk increases. Hence, bundling of risk is a common practice amongst insurance companies so that they can make their underlying risk coverage attractive for a reinsurance company.
There are two main ways in which insurance coverage is bundled together in order to create a pool for the reinsurance company. These two ways have been explained below:
Homogenous bundling refers to the process of making a large insurance pool by combining more of the same risk. For instance, an insurance company can make its motor insurance pool larger by adding more and more underlying coverage related to other motor policies. This is generally done by insurance companies as they aggregate the insurance policies from their different subsidies.
Heterogenous bundling is another important type of bundling which is used by insurance companies around the world. Heterogenous bundling refers to the mixing of different types of covers.
For instance, an insurance company reinsures its entire portfolio. This could mean that a reinsurance company bundles its risk exposures across home, motor, life, and even corporate insurance and reinsurers the entire bundle on the same policy. Since different types of underlying risks are being bundled in such cases, it is called heterogenous bundling.
The fact of the matter is that bundling is a very important strategy that facilitates the reinsurance business. Both homogenous, as well as heterogenous bundling, enable insurance companies to transfer their risks in a more organized manner.
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