Insurance Insurance Only For Insurance Companies

Buffeted by the winds of a reader’s exultations, we sometimes get things wrong. Or, if not wrong, not completely right. Daniel writes:

    “The quote in your insurance for insurance article regarding “re-insurance” is laughably ignorant and incorrect. Reinsurance is something totally different; it is insurance that insurance companies buy. Reinsurance is not a product that a consumer can buy directly…”

He’s right. Reinsurance is typically purchased by insurance companies to protect themselves from catastrophic loss, such as devastating acts of God. If we recall correctly, insurance companies were able to avoid significant losses after Katrina because they had reinsurance.

The takeaway is that insurance insurance has little directly to do with consumers and we probably won’t be talking about it again. There’s also the shame factor, but we’re saving up our self-flagellation points to buy a new hair shirt.

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  1. castlecraver says:

    Remember that AIG data theft from last month (actually happened March 31st)? Almost a million consumers, all their social security numbers on a system belonging to a someone they didn’t authorize, all on account of this practice. I was one of them.

  2. “we probably won’t be talking about it again.”

    That’s a good thing. Reinsurance is possibly the most boring area of business or law ever conceived by God or man. It makes you want to stab a pencil through your eye just to stop the painful, painful boredom.

    Typically, though, insurance companies “sell” portions of their portfolios to other insurers – some who do nothing but reinsurance, some who do both direct and re-insurance. In concept, it’s a lot like how the bank you GET your mortgage with then usually turns around and SELLS your mortgage to another bank. (Though in legal execution quite different.)

    So there’s no vast reinsurance behemoth that’s having to pay out on all the reinsurance from Katrina. Most reinsurers will only “buy” x% of a given company’s insurance portfolio, and spread their risk across industries, companies, regions, etc.

    (“Buy” and “sell” aren’t exactly the right terms – it’s a complicated transaction – but they give you the picture, since it’s not quite the same as consumer insurance either.)