Reinsurance: Theory, the New Applications, and the Future

Abstract

The reinsurance industry within the United States has undergone great philosophical and market change in recent years. The entrance of many primary insurers into reinsurance, either by the use of subsidiaries or by departments within their own corporate structure has brought about changes in pricing and in the level of expertise existing within the industry. Although proving a profitable enterprise for these new entrants, other resultant problems have surfaced and require the attention of all concerned. One of the announced aims of the United States government for many years has been to maintain a favorable balance of trade and to seek a favorable balance of payments. During the early seventies, most segments of society were striving to find new ways and techniques to solve the adverse balance of payments then existing. During this period, the writer was asked, What can the insurance industry do to help solve our balance of payments deficit? The question was embarrassing because no good answer was forthcoming. The substantially unanswered question did stimulate further research of the problem. The research was aided by a concentrated study program into all phases of reinsurance provided by a major property-liability insurer. The schedule included visits and interviews with eleven different reinsurance departments of primary insurers and three professional reinsurers. Additionally, time was spent in two brokerage houses specializing in the reinsurance market. During this period of study, large amounts of' information and literature were provided and virtually any question asked was answered. As much of the information provided was deemed confidential, some information which might have been used to support the conclusions unfortunately will have to be omitted. First consider the question which prompted this research-how does the insurance industry affect the balance of payments? Based on the latest U.S. Department of Commerce figures, the insurance industry, while contributing to the problem, is not a major source of worry (see Table Richard E. Johnson, Ph.D., C.L.U., C.P.C.U., is Professor of Risk Management at the University of Georgia. He served nearly 20 years with the Prudential Life Insurance Company of America in Sales and Sales Management positions. This paper was presented at the 1976 meetings of ARIA.