Cyber Risk in Reinsurance
February 12, 2025
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In the previous article, we have already studied the concept of layering and how it related to reinsurance policies. We are now aware that layering is used so that the risk can be comfortably placed between multiple reinsurance companies instead of a single reinsurer having to bear all the risk.
Layering is a very popular method of reinsurance and is used by almost every major reinsurance company in the world.
Hence, every student of reinsurance must have knowledge about the pros and cons of layering. In this article, we will provide details about the same.
There are several benefits that can be attributed to layering. Some of the most important benefits have been listed below:
The benefit of layering is that it creates a standardized mechanism using which the risk of one layer can be transferred from one reinsurer to the other. Such a transfer can even take place via the secondary market.
As a result, the sum assured offered to the ceding insurer would be much lower compared to their expectations. It is for this reason that reinsurance companies prefer to use layering so that the needs of the customers can be met better.
The ability to generate less premium while setting aside even less capital in the form of reserves encourages reinsurance companies to underwrite layered policies.
The process of layering also causes certain disadvantages to the ceding insurer as well as to the reinsurance company. The details of the same have been mentioned below:
This can become quite tedious from the point of view of the ceding insurer who has to undergo the entire process again and again. Also, they receive the claim payments separately from each reinsurer. It can be difficult to track such payments and ensure that the claims which have been made have been settled in a timely manner.
Ceding insurers have often complained about the lack of service provided to them by reinsurance companies. This can be fixed by setting aside a larger chunk of the premium for administrative purposes.
The bottom line is that layered insurance policies have their pros and cons. However, for most parties, the pros far outweigh the cons. This is the reason that layering is common in the industry.
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