The Insurance & Reinsurance Market

Insurance is a mechanism of risk transfer in which an individual or organisation (the insured) pays a comparatively small, certain amount (the premium) to an insurer in exchange for the insurer's promise to indemnify or pay benefits following a defined, uncertain loss. The insured exchanges the uncertainty of a large loss for the certainty of a small cost. Insurance does not prevent loss from happening; it spreads the financial consequences.

Insurers can make this promise because they operate a common pool into which many insureds contribute premiums. Losses suffered by the unfortunate few are paid from the contributions of the many. For pooling to work fairly, the contributions must be equitable — each member should contribute in proportion to the risk they bring to the pool, which is why underwriting and rating matter.

The pool works because of the law of large numbers: as the number of similar, independent exposures increases, the actual loss experience of the group tends towards the statistically expected outcome. This lets insurers forecast aggregate claims with reasonable accuracy even though any single loss is unpredictable. The larger and more homogeneous the pool, the more stable and predictable the result.

A direct insurer (primary insurer) accepts risk directly from the public and from businesses. A reinsurer insures the insurers — it accepts a share of the risks written by direct insurers, helping them to spread risk, stabilise results, increase capacity and protect against catastrophe accumulations. The direct insurer that passes on risk is the cedant, and the process is cession. Retrocession is reinsurance of a reinsurer.

A captive is an insurance company formed and owned by a commercial (non-insurance) parent or group whose main purpose is to insure the risks of that parent or group. Captives are a form of self-insurance through a licensed insurer, used to retain risk, access reinsurance markets directly and manage the group's own claims. Singapore is a significant Asian captive domicile.

Intermediaries connect buyers with insurers. An insurance agent represents the and acts on its behalf, usually distributing the products of one or a limited number of insurers. An represents the and is expected to act in the client's interest, sourcing cover across the market. This distinction — whose agent the intermediary is — matters for duties, disclosure and, where relevant, liability.