DEFINITION OF ‘REINSURANCE RECOVERABLES TO POLICYHOLDER SURPLUS’
The amount of incurred losses covered by reinsurers compared to policyholders’ surplus. Reinsurance recoverables to policyholder surplus is used to determine how dependent an insurer is on reinsurers for policy protection, and the risk that the insurer has to account for when it comes to adjustments in reinsurance.
INVESTOPEDIA EXPLAINS ‘REINSURANCE RECOVERABLES TO POLICYHOLDER SURPLUS’
Insurers use reinsurance in order to protect themselves from the risk associated with policies that they underwrite. By shifting some risk to a reinsurance company the insurer is able to take on more risk by underwriting new policies, and can reduce the risk associated with a large number of claims being made at once (such as when a catastrophe occurs).
The policies underwritten by an insurance company that are transferred to a reinsurer are referred to as reinsurance ceded. In exchange for taking on the risk of the insurer, reinsurance companies are given some of the premium that the insurer received from underwriting the policies. When an insurance company provides financial reports to regulators it indicates the amount of money paid out in claims, as well as the amount of losses that were covered through reinsurance. Losses covered by reinsurers are reported as reinsurance recoverables. To calculate the net amount of money that the insurer has paid out to policyholders, the amount of reinsurance recoverables is subtracted from the total amount of benefits paid out by the insurer.
Reinsurance recoverables to policyholder surplus is used to evaluate how much an insurer depends on reinsurance to stay solvent. A high reinsurance recoverables to policyholder surplus ratio means that a large portion of risk is being transferred to third parties, and this represents a separate risk that the insurer will have to take into account. A high ratio is a risk for several reasons. First, the insurer may find that reinsurance companies will raise the share of premium they demand for assuming some policy ris. This means that reinsurance will become more expensive. Second, reinsurers unable to cover the risk that they take on may lead to the insurer having to cover some losses.