Net line is the level of risk that insurance company holds after it ceded some of risk to reinsurers. It shows to how high losses insurer is exposed. Most of the insurers try to reinsure their risks. This enables them to take more risk from their customers and then earn more. But not all the risk can be reinsured, as well as it would be very expensive. Therefore, insurers are exposed to some risks that they would have to cover using their resources. That part of risks is the net line. All the liabilities of the insurer are called insurer's gross line.
The ration between gross line and net line is important for investors as well as regulators. It shows reliability of the insurer. It is necessary to state that insurer is responsible for whole sum of insurance. Therefore, if the reinsurer becomes insolvent, insurer will have to cover all the costs. Too low limit of net line is therefore dangerous from customers and regulators point of view.
Important role of reinsurance
Part of insurance-business is coo working with reinsurance company, those companies are "insurance of insurers". It binds with giving part or whole risks as well as some fees to reinsurer. Reinsurers are ceding part or whole of the insured risk or group of related risks, in exchange for benefits which are part of future incomings. In return to standard insurer - the reinsurer makes a commitment to pay a compensation in case of random unfortunate event which can cause in loss of wealthiness of insurer, for which reinsurer is responsible. The most important reinsurance functions are:
- The function of making insurer financial situation stronger,
- The function of stabilizing insurer financial results,
- The function of increasing the insurer's opportunities.
Some of benefits of reinsurance are following - insurer is secured of random individual incidents that can be caused for example as effect of debt of certain industry. Insurers may underwrite more policies, getting new clients, spreading their activity, making company more recognizable among other companies. Also clients got benefits since they can feel safety, due to reserves possessed by insurer.
(Singapore College of Insurance Limited, 2016)
Meaning of net line and gross line
Net line shows insurer's all liabilities minus liabilities ceded to reinsurers, while gross line shows the maximal cost the insure company can endure for specific type of risk, so gross line is calculated before any actions and shows limit of insurer liability, an insurer will mostly reduce their risks gross risks using reinsurers, it allows them to move some of liability of them causing in bigger possibilities to sell more policies. The more policies are underwritten the smaller net line of insurer is. Sometimes it happens that reinsurer refuse to insure some type of risk, or insurer is unable to pass some risks to reinsurance company, so it can cause in limitation of issuing new policies, and reducing of competitiveness of that insurer. It's obvious that big company which is potential policyholder will choose insurer with higher possibilities, and reserves.
- Mayers, D., & Smith Jr, C. W. (1990). On the corporate demand for insurance: evidence from the reinsurance market. The University of Chicago Press.
- Singapore College of Insurance Ltd. (2016) Basic insurance concepts and principles.Singapore College of Insurance Limited.
- Robert P. Hartwig, Ph.D. and others (2010) Insurance Handbook A guide to insurance: what it does and how it works. Insurance Information Institute.
Author: Michał Rogóż