What is the purpose of automatic reinsurance?

The purpose of automatic reinsurance is primarily to share risks among insurers once claims reach a specified threshold, which is often referred to as a retention limit. This mechanism allows insurance companies to manage their exposure to large losses effectively. By transferring some of the risk associated with high claims to a reinsurer after a predetermined amount is reached, insurers can stabilize their financial standing and maintain solvency. This approach enables them to underwrite policies with confidence, knowing that any substantial claims beyond their capacity will be handled by their reinsurance partner.

Automatic reinsurance is operated on a basis where the reinsurer agrees to accept risks automatically without the need for individual negotiations for each policy. This process helps in managing the volatility that can arise from catastrophic events or unexpected claims, ensuring that the primary insurer is not overwhelmed by significant financial burdens.

While techniques like automatically covering unlimited losses, prioritizing definitive claim payments, or preventing the insolvency of firms may seem related, they do not accurately capture the primary mechanism and intent behind automatic reinsurance. The core function centers on coordinated risk management as claims exceed certain thresholds, which is essential for the sustainability of insurance operations.