Consider a high rising tower. The glinting facade of glass and chrome. The towering presence of the skyscraper as it blocks out the sky from the eyeline. The whole skyline is populated by one tower bigger than the last one as if trying to reach out and touch the stars present in the space above it. While it is astounding to see such a man made structure dominating the eye sight, there is something much more incredible about the buildings as well. It is the steel that was used to build these monstrosities. The amount of metal that went in while constructing these buildings allowed it to stand tall from the ground to the top.
The unsung hero in this case is the steel which forms the backbone of the building, however, it does not get the recognition that it deserves. Something similar exists in the insurance industry. There needs to be a certain amount of assuredness that needs to be present in the industry which allows it to function. For the insurance sector, the integral role is played by reinsurers. The fundamental task of these companies is to insure the policy that has been made by another company. In simple terms, it is known as insurance for insurers.
The importance of the reinsurers can be explained through an example. Suppose there is Company A which sells insurance policies to the public. When an individual buys an insurance policy, they commit to pay a premium on this policy for any damage that can take place in the future. They pay a price for any claim that might arise from the insured asset in the future. On the other side, Company A gets to earn the premium from the policy while being liable to pay back a claim in case any such case arises.
In a simple model, the customer is paying the premium while the company is on the hook to pay off the claims. The model can be considered risky from the point of view of the company who might feel that they will not be able to pay back the claims in case they come up. In such a situation, they can then go to the reinsurer and make a commitment to them that they will pay a premium to the reinsurer while taking out an insurance on the policy that they have already sold.
The benefit to Company A in this situation is that they can transfer the risk of any claim arising in the future to the reinsurer against a premium that they will end up paying. In case a claim comes from the customer, they can essentially just become a middle man and transfer the claim from the reinsurer to the customer and bear no additional cost. Company A has been able to transfer the risk from their books to the reinsurer against a fee that they have to pay. The content in this publication is expensive to produce. But unlike other journalistic outfits, business publications have to cover the very organizations that directly give them advertisements. Hence, this large source of revenue, which is the lifeblood of other media houses, is severely compromised on account of Profit’s no-compromise policy when it comes to our reporting. No wonder, Profit has lost multiple ad deals, worth tens of millions of rupees, due to stories that held big businesses to account. Hence, for our work to continue unfettered, it must be supported by discerning readers who know the value of quality business journalism, not just for the economy but for the society as a whole.To read the full article, subscribe and support independent business journalism in Pakistan
