Promiseland, like most limited liability companies, is formed with a finite amount of capital. Hence its capacity to assume a risk for its own retained account is limited by the amount of its capital. However at times, it will be called upon to issue policies during the course of business for sum insured that are far in excess of its capacity to do so.
In order for Promiseland to insure such large risks and provide a service to its clients, it is necessary to reinsure all amounts that are in excess of its business. Hence, it can be said that without reinsurance, Promiseland will not be able to conduct its retention. Suppose Promiseland did not reinsure its risk that is in excess of its business, the 921 Taiwan earthquake could have seriously undermined its financial position.
Promiseland have managed to achieve a homogeneous portfolio by way of reinsurance and thereby reduced the exposure on the peak risks for its retained account.
In addition, the major fluctuation in claims cost, arising out of the earthquake could have impaired the financial security of Promiseland. But the good reinsurance programme that Mr Ricardo had arranged, had helped Promiseland to contain claims cost within the company’s acceptable range, thereby providing stability to its operation.
The reinsurance cover has protected Promiseland against the “shock losses” that have arised from the accumulation of insured property that were destroyed by the earthquake. |
