Unveiling its Rise and Implications in the Insurance Market
The insurance industry is a complex web of relationships involving clients, insurers, and re-insurers. In recent times, the concept of co-insurance has gained prominence as a strategic approach to managing risk and optimizing capacity within this intricate ecosystem.
In an exclusive interview with Dion Rheeder, Lombard Regional Manager for the Gauteng Region’s Commercial division, we delve into the diverse forms and applications of co-insurance, shedding light on the driving factors behind its increasing prevalence in the market.
Understanding Co-Insurance in Industry Relationships
At its core, co-insurance involves the collaboration between multiple insurers to share the risk exposure of a single policy. Dion Rheeder elucidates this concept further by explaining how co-insurance manifests within industry relationships. Lombard’s distribution model exclusively involves brokers, acting as intermediaries between clients and insurers. When a broker presents a risk that surpasses the insurer’s capacity due to reinsurance limitations, co-insurance comes into play. The insurer might provide a lead line, while other insurers participate to complete the coverage, ultimately reaching 100% of the “slipping fold,” the total amount of coverage required for the risk.
Conversely, brokers might approach insurers with a substantial portion of the risk already covered (e.g., 60% – 80%) and seek additional coverage from the insurer as a follow line. These two scenarios represent the primary ways in which co-insurance operates in the market.
The Rise of Co-Insurance: Drivers and Implications
Dion Rheeder emphasises that the surge in co-insurance can be attributed primarily to a critical factor: a lack of capacity among insurers. He reveals that reinsurers have curtailed the capacity allocated to insurers for various risks, citing substantial losses as the driving force behind this constraint. As a result, insurers face limitations in offering full coverage to clients, necessitating the involvement of multiple insurers to adequately address risk exposure.
This trend is a significant departure from the past, where insurers could offer coverage beyond 100% of the risk. The capacity crunch has become a new normal, prompting both insurers and brokers to adapt their strategies to navigate this evolving landscape.
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Benefits and Challenges of Co-Insurance
The rise of co-insurance brings forth both advantages and challenges for the market, clients, and brokers. On the positive side, insurers like Lombard have the opportunity to take follow lines, allowing them to increase their written premium without assuming undue levels of risk. This balanced approach enables insurers to maintain growth while managing their exposure effectively.
However, brokers find themselves facing new challenges in their quest to secure comprehensive coverage for their clients. The need to approach multiple insurers to fulfil a slipping fold can be cumbersome and time-consuming. Brokers may need to engage with a considerable number of insurers, leading to increased administrative burdens, especially during claims and endorsement processes.
Co-Insurance and the Shifting Landscape
As the insurance industry continues to evolve, the co-insurance trend is likely to become a hallmark of the market. Dion Rheeder suggests that brokers must adapt to this changing landscape by restructuring their operations to efficiently manage co-insurance requirements. Moreover, the escalating costs associated with facultative cover are making co-insurance a more viable and cost-effective option for insurers and clients alike.
Conclusion
Co-insurance is proving to be a dynamic strategy in the insurance market, driven by the necessity to optimize risk exposure in a capacity-constrained environment. As reinsurers impose limitations and losses mount, insurers and brokers must collaborate to navigate the challenges and opportunities presented by co-insurance.
This evolving landscape underscores the resilience and adaptability of the insurance industry as it continues to provide essential coverage in a rapidly changing world.