Why Insurance Companies Sign Reinsurance Contracts


The article below was culled off a management report which I thought is immensely useful in valuing insurance companies. Enjoy it.

Insurers enter into reinsurance contracts primarily to:
a. Spread the risk of their insurance contracts
b. Reduce exposure on particular risks or classes of risks
c. Provide the financial capacity to accept risks and contracts with larger face amounts than those that could otherwise be accepted
d. Help stabilize operating costs
e. Improve their statutory surplus position; transfer from the ceding company to the reinsurer the part of the surplus strain that results from writing new contracts.
f. Protect against accumulations of losses arising out of catastrophes
Agenda paper 3J/68J
6
g. Limit liabilities of captive insurers
h. Assist in financial and tax planning strategies
i. Obtain underwriting assistance with respect to risk classification, or broaden the ability to market products with which the cedant has little experience
j. Exit a line of business
k. Test new coverages or new classes

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