Net line: Difference between revisions
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'''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. | '''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. | ||
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==Limitations of Net line== | ==Limitations of Net line== | ||
The limitations of net line are: | The limitations of net line are: | ||
* High cost | * High cost - reinsuring all the risk would be very expensive for the insurer. | ||
* Some risks are uninsurable | * Some risks are uninsurable - some risks, such as natural disasters, cannot be insured. | ||
* Reinsurers are not always available | * Reinsurers are not always available - in some cases they might not be available or willing to reinsure the risk. | ||
* Reinsurers have their own limitations | * Reinsurers have their own limitations - some reinsurers have their own limitations in terms of the amount of risk they are willing to take on. | ||
* Net line can be difficult to calculate | * Net line can be difficult to calculate - the net line is calculated by subtracting the reinsurers’ part of the risk from the [[total risk]], which can be complicated. | ||
==Other approaches related to Net line== | ==Other approaches related to Net line== | ||
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In summary, there are three main approaches that insurers can use to manage their risk exposure: Risk Transfer, Risk Mitigation, and Risk Retention. Risk Transfer involves transferring risk to another entity, Risk Mitigation involves implementing strategies to reduce the likelihood of losses, and Risk Retention involves covering losses with the insurer's own resources. | In summary, there are three main approaches that insurers can use to manage their risk exposure: Risk Transfer, Risk Mitigation, and Risk Retention. Risk Transfer involves transferring risk to another entity, Risk Mitigation involves implementing strategies to reduce the likelihood of losses, and Risk Retention involves covering losses with the insurer's own resources. | ||
{{infobox5|list1={{i5link|a=[[Self insured retention]]}} — {{i5link|a=[[Pure risk]]}} — {{i5link|a=[[Risk transfer]]}} — {{i5link|a=[[Cross margining]]}} — {{i5link|a=[[Capital buffer]]}} — {{i5link|a=[[Concentration risk]]}} — {{i5link|a=[[Risk retention group]]}} — {{i5link|a=[[Capital rationing]]}} — {{i5link|a=[[Optimal capital structure]]}} }} | |||
==References== | ==References== | ||
Latest revision as of 01:15, 18 November 2023
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.
Examples of Net line
- Net lines can be used by insurance companies to limit the amount of risk they take on when writing policies. For example, if an insurance company has a net line of $10 million, it means that the company will reinsure any losses up to $10 million. If a policyholder has a claim that is more than $10 million, the insurance company is responsible for covering the difference.
- Another example of a net line is when an insurance company reinsures its policies with another insurance company. In this scenario, the insurance company will set a limit on the amount of risk it is willing to accept. This limit is known as the net line, and it is the maximum amount of risk that the insurance company is willing to take on. Any losses that exceed the net line will be covered by the reinsurer.
- Additionally, net lines can also be used in the context of catastrophe bonds. In these cases, the net line is the amount of risk that an insurance company is willing to take on before it decides to purchase a catastrophe bond. The higher the net line, the more risk the insurance company is willing to accept.
Advantages of Net line
One of the main advantages of net line is that it reduces the risk of the insurance company. It helps insure that the company is not overexposed to losses from a particular risk. Here are some of the other advantages:
- It allows the company to retain a portion of the insurance risk, enabling them to better control their own risk and exposure.
- It reduces the amount of reinsurance premiums that the insurance company needs to pay, thereby increasing their profits.
- It provides flexibility to the insurer, as they can easily adjust their net line depending on the changing market conditions.
- It allows the insurer to retain better control of their own risk profile, avoiding any sudden and unexpected losses.
- It gives the insurer more opportunities to invest their capital, as they can choose to retain some of the risk while ceding the rest.
Limitations of Net line
The limitations of net line are:
- High cost - reinsuring all the risk would be very expensive for the insurer.
- Some risks are uninsurable - some risks, such as natural disasters, cannot be insured.
- Reinsurers are not always available - in some cases they might not be available or willing to reinsure the risk.
- Reinsurers have their own limitations - some reinsurers have their own limitations in terms of the amount of risk they are willing to take on.
- Net line can be difficult to calculate - the net line is calculated by subtracting the reinsurers’ part of the risk from the total risk, which can be complicated.
- Risk Transfer: Insurers may transfer some of the risk to another entity, such as a reinsurer, to reduce their risk exposure.
- Risk Mitigation: Insurers may also try to reduce their risk exposure by implementing strategies to reduce the likelihood of losses. This can include diversifying risk, implementing risk management strategies, and purchasing additional insurance.
- Risk Retention: Insurers may also choose to retain some of their risk exposure and cover losses with their own resources. This is known as the net line.
In summary, there are three main approaches that insurers can use to manage their risk exposure: Risk Transfer, Risk Mitigation, and Risk Retention. Risk Transfer involves transferring risk to another entity, Risk Mitigation involves implementing strategies to reduce the likelihood of losses, and Risk Retention involves covering losses with the insurer's own resources.
| Net line — recommended articles |
| Self insured retention — Pure risk — Risk transfer — Cross margining — Capital buffer — Concentration risk — Risk retention group — Capital rationing — Optimal capital structure |
References
- 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
