Monday, September 18, 2023

The Magic of Insurance Your Insurance Company Will Not Tell You..

From the outside, it seems miraculous that spending relatively small amounts every month can guarantee that if your house burns down, it will be substituted completely, seemingly for free.

Yet this wasn’t continuously the case. The first ever known insurance contract, or policy, was a marine cover originating from Genoa in the 14th century. For the next few hundred years, insurance restarted to be used almost exclusively in shipping with the help of maritime trade.

The lessons comprehended during this period were only applied to general property – and then nearly everything else – in the last 200 years. And it was solely in the last 100 years that the average man in the roadway has been able to access defined insurance products for his or her home, transferable property, or investments.

Insurance was made of the concept of the acceptable fortune of the many indemnifying – or covering the risk – of the misfortune of the few.

The idea developed in shipping as the cost of hiring, provisioning, and crewing a ship was typically too expensive for individual merchants or traders to bear alone. Many traders, often with different merchandise, nevertheless, could each pay a portion of the price of hiring a ship.

This idea of shared cost soon extended to loss.

If a ship plunged into the ocean, everyone lost everything. But, if each of the traders who shared the ship hire costs put extra money into a different pot, and did this for all the ships they had goods on, for example, if one in 10 ships descended into the ocean, the extra money in the pot from all the vendors with goods on the 9 ships that didn’t sink could be used to compensate the traders on the one ship that went down.

The idea of the origin, the beginning of insurance.

Since then, insurance has been necessary for human growth, providing the funds to take the chances (or manage the risk) to experiment, explore, trade, invest and grow. Without Insurance, the current economy would not be possible.

At the individual rank, if not for Insurance, we would not be able to open bank accounts, secure credit, buy cars, and homes, enlighten ourselves, make investments or leave our money and assets to our heirs.

As it’s today, Insurance companies serve as the clearing houses or custodians of financial risks. Insurance companies allow monetary risk to be transferred from someone and corporates (known as the insured) to the custodian of the risk (known as the indemnifier or the insurer). To have their hazard insured, the insured pays a fee to the insurer. The more insured individuals who pay a cost to the insurer, the small this fee can become. Ultimately, the theory went, there would be so many small fees in the pot, that regardless of the measure of any single individual loss, there would still be enough money in the pot to cover the loss.

But this was not continuously the case.

War, civil unrest, plague, earthquake, or other natural catastrophes, ensured that losses could be so large – and so general – that they could surpass the holdings of even big national or international insurers with hundreds of thousands of donors or policyholders.

This problem led to the development of reinsurance.

To handle losses larger than their total donations from policyholders, insurers moved part of the risk that they had taken on to third-party corporations for a fee. While these third-party corporations (called Reinsurers) would predominantly never be called upon to help, they would resume receiving a stream of fees for taking on the risk that they had agreed to indemnify.

With enough insurers reinsured amongst enough reinsures, when disastrous or once-in-generation risk events occurred, the size of the pot that individual insurers would have access to was many times larger than their own holdings.

Today, the concept of Reinsurance allows insurers to take on risks potentially costing significantly more than the value of the funds that individual insurers hold.

Since the Reinsurance industry is global, reinsurance also provides a wonderful mechanism for individuals in developing countries to access funds and coverage of the much richer developed world.

Thanks to Reinsurance, when relatively few insurance companies in countries like Nigeria and South Africa encountered an avalanche of claims during the recent Covid-19 pandemic, their reinsurance understandings with global reinsures like Munch Reinsurance Company, Swiss Re, Lloyd’s, and Berkshire Hathaway allowed them to service claims seriously in excess of their own holdings.

This is the true magic of Reinsurance.

This is also how insurance companies build their reputations and gain their customer’s confidence. Through Reinsurance, insurers are able to guarantee their ability to meet their obligations to cover a client’s risk even if these risks are significantly larger than their own holdings and ability to cover.

As a matter of fact, Reinsurance arrangements ensure that all claims can be paid whenever needed, regardless of their size or number.

Reinsurance arrangements also provide insurance companies funds to trade with, build and increase market shares for the growth of their companies. Coronation’s Reinsurance contracts, for example, have won our business a significant market share in Nigeria’s insurance market, this enables us to indemnify large-scale risk with minimal negative financial impact.

Financial Stability is a major catalyst for business continuity and the safety of funds in any industry. Reinsurance contracts with highly rated reinsurance companies are critical for business stability, development, and growth.

Coronation Insurance, for example, has a number of reinsurance understandings with the likes of Africa Re, Munich Re, Swiss Re, Continental Re, WAICA Re, FBS Re, and many others. These domestic and international partnerships provide Coronation policyholders the assurance to go about their business securely in the knowledge that we have their backs for each and every one of the risks that they have indemnified with Coronation.

By purchasing the best reinsurance cover for each of the risk portfolios that Coronation manages, Coronation provides clients the confidence and ability to oversee their own risks. 

Coronation’s relationships with highly rated reinsurance companies ensure the strength of the business.

These reinsurance relationships also enable customers to invest and grow, as well as being secured in the confidence that when they suffer a casualty this will not wipe out their businesses built over the years, which includes their life savings, or homes.

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