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What Is Reinsurance?

Reinsurance is an increasingly popular strategy for life insurance companies to issue policies in excess of what state regulators allow them to issue. Generally, insurance companies cannot issue policies in excess of 10% of their net worth, in order to ensure they can afford to pay out their policyholders. However, if they in turn reinsure the policies they issue above that limit, they reduce their risk and can continue to sell policies.

Reinsurance makes sense for some insurance policies, such as homeowners insurance, where a natural disaster can potentially ruin a company and render it unable to pay its policies. By spreading the risk, they can make sure policyholders are paid. With life insurance, however, there is no real equivalent, and reinsurance functions primarily as a way to evade the strict regulations on the industry. Since different states and countries have different regulations on reinsurance, some states, like Vermont, have disproportionate amount of reinsurers who take on a disproportionate amount of risk.

What is Captive Reinsurance?

Another facet of the issue is the rise of “captive reinsurance,” where a life insurance company transfers its risk to a wholly owned subsidiary, or captive, reducing its risk on paper, but still carrying the full weight of its risk distributed across more companies. Reinsurance companies are subject to less stringent regulations than insurance companies, and consequently enable insurers to take on more risk than they would normally be allowed.

What is Coinsurance?

Co-insurance is a type of reinsurance particularly well-suited to captive reinsurance, because it involves a close working relationship between the reinsurer and the ceding company. With co-insurance, the ceding company provides a portion of the revenue it gets from the policy through premiums, fees, and loans to the company taking on the risk, and in return receives an allowance for administering the policy. When used in conjunction with captive reinsurance, it streamlines the transfer of revenue between an insurance company and a reinsuring subsidiary.

The use of co-insurance agreements may indicate that a life insurance company is using captive reinsurance, and therefore that it may be carrying more risk than would be advisable. It can be hard or impossible to identify companies that make use of the practice. This is by design, as coinsurance blurs the lines between subsidiaries, holding companies, and separate entities. Many major insurers are involved with coinsurance or captive reinsurance. If you’re having issues with a life insurance policy, please contact the Evans Law Firm at (415) 441-8860, or by email at

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