Cyber Risk in Reinsurance
February 12, 2025
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In the previous article, we have already seen how reinsurance pools work. We have also seen how the governments of countries around the world collaborate with private reinsurance companies in order to make the concept of reinsurance pools a success. However, a deeper knowledge of this subject is required by any student. Hence, in this article, we will have a closer look at the pros and cons of this arrangement.
The popularity of reinsurance pools is the result of the many advantages that this arrangement has to offer. The details related to the advantages are as follows:
Increasing premiums make reinsurance less affordable which ultimately trickles down and makes insurance less affordable in itself. When reinsurance companies have their cash flows secured by the government, they are able to offer reinsurance at an affordable price.
Fewer insurance companies also meant lesser scale for reinsurance companies. As a result, the reinsurance costs were prohibitively high. The entire situation was a vicious circle. With the advent of reinsurance pools, governments were able to encourage more insurance and reinsurance companies to conduct business in that area. Over the years, it has transformed from an underpenetrated insurance market to a vibrant one.
The funds collected in the form of premiums are usually less than the amount of money that has been paid out in claims in the long run. Hence, empirically, governments have not had to spend taxpayers’ money. However, it cannot be denied that the money needs to be put at risk.
Reinsurance pools have also been the subject of a lot of criticism. This is because of the following reasons.
This lack of transparency can mean increased risk for the governments as well. However, in real life reinsurance companies ensure that they do not take an excessive risk since their partnership with the government is quite valuable to them.
For instance, it is possible that the government may take on excessive risks in order to please the residents of a particular area because elections may be around the corner. In such cases, these reinsurance pools can become the reason for financial duress. Reinsurance pools require political commitment from the political class. They must refrain from misusing this policy in order to achieve short-term electoral gains.
The bottom line is that reinsurance pools have their own pros and cons. However, it needs to be understood that at the moment, the pros outweigh the cons and as a result, the popularity of this mechanism is increasing. It is likely that this streak will continue for a few more years.
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