When hunting for a job in insurance, most people overlook reinsurance because they don’t have a solid grasp of the concept (see the insurance pyramid), or simply because they just haven’t heard about it.
This is slowly changing and many more individuals are looking into the industry and are starting to consider it over and above banking. This is because generally the reinsurance industry nurtures a more balanced work-life balance and retains the biggest hook for the most ambitious types – bonuses.
How reinsurance works in practice
Reinsurance protects insurance companies (and governments) against catastrophic losses which might otherwise result in their company going under. An insurance company will build up a portfolio of risks over the year, however they know that if a catastrophic event occurs, let’s say a Chilean earthquake or a Australian bush fire, their portfolio could be at risk of sustaining huge losses. They know that if such an event occurred, their company would not be able to continue writing business because they do not have the reserves necessary to continue writing business. So they buy reinsurance to protect their capital.
The concept of reinsurance is the same as insurance and is based on risk transfer, just on a larger scale. Instead of you or I wanting to offload the risk of our house being burnt down in a bush fire, insurance companies want to transfer the risk of a bush fire spreading throughout their entire portfolio and destroying 95% of the houses they insure.
So let’s look at the premiums involved. If I want to insure my house for $250,000, I would probably have to pay about $1,000 for the year. The insurance company has a portfolio of 10,000 similar houses in the area which is prone to bush fires, so the insurer could potentially loose $2.5 billion but they have only taken $10 million in premiums.
This is where reinsurance comes in. Reinsurers will take some of that risk off their hands, for a price. Let’s say the insurance company want to buy reinsurance to protect themselves against $2 billion of losses; this might cost them $5 million.
As one reinsurer couldn’t take on the entire $2 billion of exposure on its own, this would be broken down into ‘lines’ and different reinsurers would take slices of each line. To put this into context for you, when I worked in reinsurance, my company’s average premium size was $250,000. Compare this to when I underwrote Professional Indemnity insurance for SMEs for an average of £3,000 or that of a travel insurer which takes on risks for £50.
Reinsurers themselves then have large portfolios with exposures running into the billions of dollars, however they might only have 200 clients, compared to the 10,000 the insurer has. This means it takes fewer people to carry out the job of underwriting those risks, or in the case of the broker, the design and placement of the insurance programs. However these individuals need to be highly skilled professionals, who have the correct experience and can deal with the stresses that come with running such a large portfolio.
Can you now see why reinsurance underwriters and brokers get such inflated salaries? Because there is more risk per client and the subsequent responsibility is greater, and if they get it wrong and offer reinsurance to the wrong insurance company or take too large a slice of a risky deal, it could mean the company suffers dramatic losses. However if you are fantastic at what you do, you can reap the rewards.
If you work in reinsurance you can expect to be on a $100,000 basic salary after 3-5 years and it just keeps going up. If you move out to Bermuda, you can expect to be on a $120,000 – $150,000 basic salary (tax free), with a housing allowance, a flight allowance and a substantial bonus by the time you hit your 30th birthday. And I’ve seen bigger.
…and the best thing about reinsurance…
Reinsurance is super exciting. Most people in the industry would describe reinsurance as: “gambling for the educated”, not that they would ever say that with a journalist nearby.
Every day you are weighing up the odds that a hurricane hits the east coast of America, or you’re assessing the risk there will be an earthquake in New Zealand, or a windstorm in central Europe.
Yes, there are sophisticated models behind you, but much like a trader, you’re making the decisions and you are accountable for your own results.
And if you get it right, the payoffs can be huge!