Insurance Business

Concept of Reinsurance Broker: How they Differ from Direct Brokers?

In order to understand the concept of reinsurance broker, one must understand the concept of reinsurance first. Reinsurance is the insurance for the insurance companies. A reinsurer is a person that arranges reinsurance contracts between the direct insurers and reinsurers. A reinsurance broker works on behalf of both these parties and is therefore obligated towards them. Such a broker is also engaged in the task of negotiating contracts in addition to finding the best-suited policies for every client he/she represents.

This piece of writing discusses the concept of a Reinsurance broker and how such brokers differ from direct brokers. 

Who is a Reinsurance broker?  

Simply put, a reinsurance broker is an insurance broker that works with the insurers to sell reinsurance instead of working with the members of the public and selling them insurance. In reinsurance, the insured client is an insurance company that is looking to acquire protection or reinsurance from a larger insurance company for a specific risk or class of risks.

Such a broker is an intermediary individual or a firm that is paid a commission or a remuneration to find a new business on behalf of both the insured client and the insurer. The functions of such a broker also involve negotiating terms and conditions of the contract, such as rates, while securing policies best suited for the client. 

What are the capital requirements for the registration of a Reinsurance Broker?  

The minimum capital requirement for registration purposes of such a broker is Rupees 4 crores, and such a broker is required to maintain a minimum of 50 per cent of the net worth of the minimum capital requirement.     

What is the application fee for a Reinsurance broker?  

For the grant of a Registration Certificate for a reinsurance broker, the applicant has to make an application fee of Rupees 50 thousand. Additionally, on grant of in-principal approval, a sum of Rupees 1,50,000 has to be submitted. Further, for the renewal of registration of such a broker, a sum of Rupees 3 lakhs has to be submitted to maintain its validity every three years.

What are the reasons for purchasing reinsurance?  

Reinsurance is purchased by the insurers for the following reasons:

1. To limit the extent of the insurer’s liability regarding a particular risk.
2. To stabilize the extent of losses.
3. To protect itself from the dangers of catastrophes.
4. To increase the capacity to bring in new clients.
5. To offer a more diverse coverage.
6. To free up cash flow.

When a number of insurers purchase their insurance policies from the same reinsurer, they share the risk and limit their own net losses in case of a specific event or disaster. The role of such broker in this scenario is to recommend the best possible solutions covering a maximum extent of potential loss at the most affordable premiums on the basis of their vast knowledge and experience in the reinsurance market.

Role of Reinsurance Brokers  

Following are the roles of Reinsurance Brokers: 

• Securing best deal available in the market: purchasing reinsurance is a complicated and time-consuming process which requires specialised services of a reinsurance broker. A broker helps the insurance company to secure the best deals available in the market at the same time while offering before and after-sales experience.

• Reviewing and drafting of contracts: a reinsurance broker assists the insurance company in placing the risk and selecting the best possible policy after reviewing and negotiating relevant terms and conditions of insurance contracts. Further, a broker continues to advise on and draft new contracts. 

• After-sales service:  the task and responsibility of a reinsurance broker do not end with the sale of insurance policy^[1] to their client but go beyond that. A broker also continues with the task of collecting payments and offering support with claims. The broker continues to support the insured once the contract concludes with reporting of liabilities and closing open claims.

How does a Reinsurance Broker differ from a Direct Broker?   

A Direct Broker offers a host of insurance products from a number of companies and suggests the best possible insurance product for his clients. Direct brokers represent the clients and not the insurer. Unlike reinsurance brokers who represent both insurer and the insured, Direct Brokers act on behalf of and in the interest of their clients, that is, the end consumer. 

The duties of a reinsurance broker only extend to the insurance companies, which in turn advise and offer insurance policies to the public and individual policyholders. Such brokers have no link with the individual policyholders, and most of such individuals have no idea that reinsurance has been used on their policies.

Read our Article: What are the different categories of Insurance Brokers?