The evolution of reinsurance

23 March 2016 Kelly Barron, Tial Technologies
Kelly Barron, Marketing Consultant, Tial Technologies.

Kelly Barron, Marketing Consultant, Tial Technologies.

Reinsurance is an essential component of the insurance process. It has evolved over the years however reinsurance initially started out as a risk management tool which was used to assist primary insurers shoulder risks.

Reinsurance adjusts accordingly with portfolio diversification and through amalgamation, it provides access to expertise across multiple concentrations and aggregated industry data.

Ancient history

The concept of sharing the risk began when ancient Chinese merchants would spread their cargo across numerous ships rather than retaining the risk of a sinking boat, damage and piracy.

The Babylonians created the Hammurabi Code, a system of maritime loans around 3000 BCE to protect against ship losses, these relieved the borrower from having to repay the loan in the event of the loss due to certain accidents.

A system of maritime law was created by Rhodes around 916 B.C., which included the notion of settling losses that were incurred for the benefit of all based on the “general average” thereby “the loss of one was divided amongst several.”

High middle ages

Maritime loans ran into conflict with the Church law dealings in the 13th century; Pope Gregory IX condemned maritime loans in 1236, he banned their use as they were considered usurious and this resulted in financial change in contracts.

Late middle ages

In the 14th century; due to the Hundred Years’ War, the development of insurance in England and France was hindered however business thrived in Italy during the Renaissance.

Early agreements; considered as reinsurance treaties, were developed along with insurance contracts. The earliest known reinsurance agreement was dated on July 12, 1370. This contract meets the distinguishing characteristic of an accurate reinsurance contract.

Coinsurance emerged as a solution, often a broker would present a risk to numerous potential insurers, and those interested would sign their name under the description of the risk; hence came the term, “under write the risk”.

Age of enlightenment

The need for insurance grew and the industry evolved significantly during the 18th century with various aspects of life. The formation of modern reinsurance business was established in the first half of the 19th century as majority of fire reinsurance was written on a coinsurance basis by direct writing companies rather than by reinsurance companies.

Modern history

The early 20th century was plagued by catastrophes; natural disasters, the sinking of the Titanic, World War I and the influenza pandemic. Many reinsurance treaties contained clauses rendering null and void in the case of an outbreak of war after World War I; shortly after the beginning of World War II, trade with business partners in hostile countries was forbidden in many of the nations at war.

Insurers and reinsurers suffered tremendous losses during the Depression Era and war years, however significant growth in the reinsurance market ensued post-war and the remainder of the 20th century.

The 2000’s

The beginning of the 21st century reinsurers focused on the cost of capital and return on equity. Towards the end of the 2000’s, increased need for reinsurance was made possible due to regulatory requirements, tax legislation, and innovative products along with new pricing models which forced some direct writers to sell reinsurance operations.

Reinsurance today

Today; we find ourselves in the 21st century during the Big Data Age and the Social Age, facing new market realities such as; natural disasters, disease, environmental deprivation, political mayhem, terrorist attacks, and disruptive technologies like cyber risks, drones, driverless cars, and big data.

Contemporary history

As history within living memory continues to evolve with future generations, reinsurers must find a means to adapt to the emerging risks that create challenges for the insurance industry.

Market realities are likely to stay and gradually become more complex; insurance providers will need innovative reinsurance solutions; not only to build resilience but also to thrive in this evolving risk landscape.

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