Thursday, July 26, 2007

Insurance & Reinsurance

Berkshire Hathaway, Warren Buffett's company, has a significant insurance and reinsurance business, Berkshire Hathaway Re. Reinsurance is insurance that is underwritten by a reinsurer to insure the risks of the primary insurance companies themselves. The risks that reinsurance companies take on are usually called catastrophe risks - so called because they are contracts written to protect the insurance companies from major disasters, such as hurricanes, tsunamis, and terrorist attacks where the damage to life and property is of a very great magnitude.

Reinsurance companies need to be very well capitalised - Berkshire Hathaway easily falls into this category (Mr Buffett has about $40 billion in cash sitting around doing nothing). Without adequate capitalisation, the reinsurance contracts would be of low quality since the reinsurers would be close to insolvency in the event that a catastrophe materialised.

In the case that a single reinsurer is unable to take on all the risk, reinsurance intermediaries, such as Benfield, help to place the treaty contract to multiple reinsurers in order to spread the entire risk amongst several companies, rather than just a single one.

All the major reinsurance intermediaries have a presence in Singapore; I managed to have a chat with a guy at Benfield Asia during a career fair and it was a very pleasant experience.

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