I see in the ads that almost every insurance company is using a particular model in terms of comparing rates or profitability. However, in my opinion, most insurance companies use an incorrect model when pricing an individual policy. So what’s the best reinsurance approach?
A proper reinsurance approach would be to:
• Underwrite a block of policies on the underwriters or a broker. See if the companies are paying claims or not.
• See if the insurance company is following general principles of risk insurance.
Underwriting the risk on an individual basis
• Experience each personal responsibility. Where was the accident? How old was the child? Was there an airbag? Something else I want to know.
• Would it cost us $3 million to insure this risk over a year? If it would, then it may be a good deal to insure it ourselves.
• Is there another way I can get the risk insured? If no, then I better act now.
Underwriting the risk on a financial basis
• Have the investor or reinsurance companies pay a reserve on the insurance company’s books. I don’t have to have all the risk assumed on my books. This is a “reinsurance” cost, so I could take some of the risk off my books.
• Is there a fixed form of debt underwriting the risk? Some funds would take all the risk and pay the lender on my books.
• Will the insurer have my name, address, policy number and premium history on file with their systems? This is a critical information I want to know.
Reinsurance, like any insurance expense, is an expense in the short term, but hopefully will benefit the insured in the long term.
Andrea Miteski, PhD and MD in the field of reinsurance. Long term senior insurance executive with specialization of reinsurance optimization.