Reinsurance
What is reinsurance?
Reinsurance, sometimes referred to as stop-loss insurance, is a special type of insurance between two different insurance companies. It is essentially insurance for insurance companies.
A company looking to protect its insurance portfolio, known as the ceding party, forms an agreement with a company that has the capacity to insure a portion of its portfolio, called the reinsurer.
This agreement protects the ceding party by offering protection from a high volume of claims.
If an unexpected event occurs, such as a natural disaster, and the ceding party experiences large obligations due to claims, insurance funds from the reinsurer via a reinsurance agreement can help the ceding party stay solvent and be able to pay out claims.
Why is reinsurance important in healthcare?
Health insurance is a critical part of the greater healthcare ecosystem. If health insurance companies are frequently experiencing insolvency, this instability erodes trust in the system and makes all facets of healthcare function less efficiently.
Indirectly, reinsurance provides a foundation for the greater concept of health insurance by ensuring health insurance companies are ideally always able to pay out claims, no matter what unexpected events may unfold.
Reinsurance also allows health insurance companies to operate with greater profit margins. For example, with a reinsurance agreement in place, the ceding party is able to underwrite a higher number of policies and take on greater risk if they have a backup plan for worst-case scenarios.
Ideally, when health insurance companies are more profitable and able to operate more freely, patients experience lower premiums and deductibles due to increased efficiency and competition.