Who are Reinsurance Brokers? - Their Compensation and Services

We now know that a reinsurance contract is a contract between an insurance company and a reinsurance company. However, up until now, we have been assuming that the reinsurance company directly deals with their customers i.e. the insurance company. However, this is generally not the case. In a large number of cases, insurance companies deal with reinsurance companies by using the services of a specialized middleman known as “reinsurance brokers”. In this article, we will have a closer look at what reinsurance brokers are as well as the services that they provide.

Who are Reinsurance Brokers?

The process of reinsurance can be incredibly complex. It is not like buying individual policies where only a very small number of options exist. Insurance companies tend to have large and complex risks on their balance sheets and there is definitely more than one way using which such risks can be covered.

Reinsurance brokers are experts at finding out the best and cheapest way to insure complex risks. Hence, many insurance companies decide to employ their services so that they can benefit from their professional experience.

Compensation of Reinsurance Brokers

Reinsurance brokers earn their revenues either in the form of a commission or in the form of a fixed fee. Sometimes the structure is a combination of the two. This means that there is a minimum fixed fee paid for reinsurance business provided to a certain amount and then incremental rates of commission are offered to encourage reinsurance brokers to place their business with the same company.

Traditionally, the reinsurance brokerage is paid out of the premium paid by the insurance company to the reinsurer. This means that the reinsurer has control over what percentage they pay out as a commission.

In the past few years, many insurance companies pay a fee or commission to the reinsurance broker on the condition that they will not charge any direct or indirect compensation from the company which is actually providing the reinsurance service.

Services Provided by Reinsurance Brokers

Reinsurance brokers are preferred by insurance companies since they provide a wide variety of services. Some of the services provided by the brokers have been listed below:

1. Selection of Policies: As mentioned above, there are multiple ways in which the same risk can be covered using different types of reinsurance policies.

   Reinsurance brokers have a lot of experience in taking out reinsurance policies. Based on empirical data, they are better aware of which types of risks need to be covered and the types of policies that will provide optimal coverage. This is the reason why the selection of policies as well as the selection of reinsurance companies that can provide the best coverage is one of the biggest services provided by reinsurance brokers to their clients.

2. Negotiating Rates: Reinsurance brokers tend to purchase reinsurance policies for a large number of firms. Hence, these reinsurance brokers control a lot of business which they can redirect to reinsurance companies.

   Most reinsurance brokers are aware that controlling such large businesses means that they have a lot of bargaining power. They tend to use this bargaining power in order to obtain a favorable rate for their clients. Reinsurance companies provide special rates to reinsurance brokers which are not available if the insurance company decides to directly place its policy.

3. Assistance With Administrative Tasks: Issuance of a reinsurance policy is a complicated endeavor. It requires a lot of administrative effort in the form of paperwork.

   For instance, the reinsurance company creates a reinsurance proposal. This means that they create a document that provides details about the risk factors and loss statistics. They release this information to the open market and solicit bids from reinsurance companies.

   It is also the task of the reinsurance broker to carefully evaluate the policy wording of the reinsurance contract in order to ensure that the interests of their clients are not being compromised. These administrative tasks require a lot of skill and specialization related to the reinsurance market and hence are best performed by the reinsurance broker.

4. Assistance With Claims: Reinsurance brokers also help their clients obtain claims within the best possible time frame. Since reinsurance brokers know the market so well, they are aware of the claim pay-out ratios of different insurers.

   They are also aware of the various documents which need to be submitted in order to ensure faster processing of the claim.

   Most reinsurance companies have a separate claims helpdesk which is set up for exclusively processing the claims related to policies issued by reinsurance brokers. Hence, their ability to offer bulk business helps them obtain better service terms for their clients.

5. Timely Interaction with the Insurer: Reinsurance brokerage companies interact with the reinsurance companies on behalf of their clients. This means that they keep a track of the different documents required by the reinsurance companies and provide it to them in a timely manner.

   Also, it is the job of the reinsurance company to ensure that the reinsurance premium is paid in a timely manner. Since insurance companies have several reinsurance policies which are simultaneously operating, they may miss making a payment. Most reinsurance brokers will pay on behalf of their customers and then later charge it back to them.

The fact of the matter is that reinsurance brokers are significant players in the reinsurance industry. They control a large part of the industry because of the fact that the services provided to them are considered to be valuable by a large section of the reinsurance industry.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.