Understanding Insurance vs. Excess Insurance vs. Reinsurance

There are different types of insurance policies, and each has its own requirements. A typical insurance policy is an acquired policy, which covers the financial costs of an insurance claim up to a specified limit. Excess coverage covers specific amounts over and above the primary policy. Reinsurance is when firms pass on a portion of their policies to other businesses to reduce the financial costs by paying out on claims.

Insurance

A insurance policy provides compensation for financial losses or injury associated with an adverse event. In return for this compensation, the policyholder pays the insurer premiums. There are policies that protect policyholders or those named in the policy from financial harm or liability, which is the risk of being sued.

Most insurance policies, including those that individuals or companies buy, are termed primary insurance. Primary insurance is a plan that covers the monetary obligation of the policyholder due to a triggering event. Primary insurance goes into effect first, even if other insurance policies have also triggered. The primary insurance is the insurance company that handles the approved claim first and foremost without additional coverage ever coming into play.

For example, the primary coverage of a fire insurance policy on a home or office would go into effect in the event the insured property experienced fire damage and a claim was filed by the insurer.

Primary Insurance Requirements

There may be restrictions regarding timing and circumstance, including promptness in reporting the claim, but the insurance carrier's obligations generally follow a similar routine. Each primary plan has a upper limit on the quantity of coverage available and frequently sets deductible constraints for the customer. Primary policies pay out on claims even if there are other outstanding policies covering the same risk.

Primary Insurance Medicare

Medicine insurance generally refers to the first payer of a claim, up to a certain limit of coverage, beyond which a secondary payer is responsible for additional payment amounts.

For example, those with private insurance who have a secondary policy through Medicare would have their primary insurance pay for claims up to the allowed amount. Beyond that limit, Medicare would cover any deductibles. In other words, Medicare would only cover costs if there were any costs that the primary insurer didn't cover.

Excess Insurance

Excess insurance coverage will make a payout after the primary insurance limit has been exhausted or consumed. For example, if the primary insurance coverage limit was $50,000 and the excess policy covered another $25,000, a claim of $60,000 would result in a $50,000 payout from the primary policy and $10,000 from the excess policy.

Excess policies, also referred to as secondary policies, also extend the limit of insurance coverage of the primary policy or the liability policy. That is to say, the underlying policy is liable for paying any portion of a claim before the excess policy is used. However, the underlying policy may not be a primary policy but instead, could be an excess policy. Regardless of what kind of insurance, the underlying policy pays before the excess policy.

Umbrella Policy

Umbrella insurances cover numerous primary policies. For example, a family may purchase an umbrella insurance policy from an insurance company to extend excess coverage over both their car and homeowners policy. An umbrella policy does not limit its coverage to only the policyholder. For example, an umbrella policy can cover family members and people living in a household as well.

Umbrella policies are considered as excess coverage because they're considered excess coverage for claims that exceed the amount and scope of the policy that is their primary or underlying coverage. However, not all excess coverage policies are umbrella policies. When a policy applies only to one policy, it is not considered to be an umbrella insurance policy.

Umbrella Policy Benefits

You may receive lower premiums when you purchase an individual umbrella insurance policy through your present insurance provider, instead of obtaining an entirely separate policy. If the umbrella policy that you procure through your existing insurer covers the primary plans, your overall expenses will be lower and you will receive extensive coverage. Umbrella liability insurance can provide further protection against libel and slander.

Reinsurance

Insurance companies are at a heightened risk for claims due to an event. If an incident is large and numerous claims arise all at once, the premiums received from those policies won't be sufficient to repay the total amount of those claims. Insurance companies only generate a profit when insurance premiums pay for payouts over the years.

As a result, insurance companies are at financial risk if they don't properly navigate the possibility of claims from different sources. Reinsurance is an insurance policy which another insurance company purchases to lower the likelihood or exposure of any payout. The insurance company who manages the policies is known as the reinsurance company, while the insurance company passing on the policies is known as the ceding insurance company because it's ceding the risk of claim payments on the ceded policies.

In return, the reinsurer receives the premiums taken from them minus the ceding commission, which is paid to the initial insurer (the ceding insurer). In short, reinsurance is coverage for insurance companies to help them stay profitable and continue to operate. If you choose to work for or own an insurance company, you are unlikely to encounter reinsurance on the market.

Claim with Reinsurance

The basics of reinsurance are pretty similar to those of primary insurance. The ceding insurance company pays the premium to the reinsurer and creates a potential claim against future risks. Were it not for the support of the reinsurance industry, most large insurers would have either left higher-risk sectors or asked for much more premiums on their policies.

Nevertheless, accidents do happen from time to time even with a ceded policy. As a result, the reinsurer has a liability and may be forced to pay that claim, regardless of ceding the policy to the ceder.

Catastrophe Reinsurance

Another common example of reinsurance is known as a "cat policy," short for catastrophic excess reinsurance policy. This policy covers a particular limit of loss due to catastrophic conditions, such as a hurricane, that would trigger the primary insurer to fund sizable amounts of claims simultaneously. Unless there are other specific cash-call provisions, which require cash payments from the reinsurer, the reinsurer is not obligated to pay until after the original insurer pays claims on its policies.

Whether a catastrophic event occurs or not, an attraction's cost may have a massive influence on an insurance company's solvency. Hurricane Andrew in 1992 is a good example: The natural disaster damaged Florida to the tune of $15.5 billion, causing many insurance agencies to file for bankruptcy. Catastrophe reinsurance helps stop the loss and some of the costs associated with a catastrophic event.