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Within this thread I would like to help the understanding of the reinsurance and related underwriting this project deals with. All information is based on an exchange with @liesdorn and my understanding/knowledge of the topic. Let us first define the wording - 1/
Reinsurance and Underwriting: Reinsurance is also known as insurance for insurers or stop-loss insurance. This is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large 2/
obligation resulting from an insurance claim for a premium. Reinsurance allows insurers to remain solvent by recovering some or all amounts paid to claimants. Reinsurance reduces the net liability on individual risks and catastrophe protection from large or multiple losses. 3/
The practice also provides ceding companies, those that seek reinsurance, the capacity to increase their underwriting capabilities in terms of the number and size of risks. According to the Insurance Information Institute, Hurricane Andrew caused $15.5 billion in damage in 4/
Florida in 1992, causing seven US insurance companies to become insolvent. Underwriting involves conducting research and assessing the degree of risk each applicant or entity brings to the table before assuming that risk. This check helps to set fair borrowing rates for loans, 5/
establish appropriate premiums to adequately cover the true cost of insuring policyholders, and create a market for securities by accurately pricing investment risk. If the risk is deemed too high, an underwriter may refuse coverage. Risk is the underlying factor in all 6/
http://underwriting.In the case of a loan, the risk has to do with whether the borrower will repay the loan as agreed or will default. With insurance, the risk involves the likelihood that too many policyholders will file claims at once. Why does this matter? 7/
Well, Etherisc provides farmers in Sri Lanka and the sub-saharan region with for them affordable insurances. I will not go into what for insurances, etc. - for that check out @etherisc - but to sum it up, small farmers who would not be able to insure their crop against floods, 8/
draughts and other adverse weather or climate conditions. The insurance premiums are calculated using different data sets: size of the farmer’s plot, the location, the kind of crop and the expected yield based on previous yield, the expected climate and weather aspects as well 9/
as other factors which can influence the crops survival (pollution, insect plagues, etc.). Based on this there will be I guess a best/realistic/worst case scenario, which will lead to the calculation of the premium and the definition of the needed accruals. Usually the best 10/
and expected case scenario will leave the insurer to be profitable, the worst case will hit (as seen with the Hurricane Andrew example, crippling). Etherisc is active in one of the highest risk profiles I can imagine: Sri Lanka seems to be every year once in the news with 11/
floods destroying crops, etc. and the sub-saharan region with draughts, locust plagues and sandstorms (thanks mainly to deforestation…). Imagine a double whammy within one year - Sri Lanka drowns and Africa fries. The amount of claims which Etherisc would need to deal with 12/
would be crashing and be way more than the accruals (cash reserves for claim settlement) could lead to the scenario a) massive sell of $dip to generate liquidity thus destroying the value of the coin or b) Etherisc would fold under the pressure of claim settlement. 13/
Etherisc does not work with classical reinsurance companies like SwissRe, Munich Re, China Reinsurance Corp, etc. but works with their local partners like Acre Africa to mitigate the claim settlement. This has the benefit, that they do not need to pay a premium to a reinsurer 14/
(which would be substantial as the insured cases are in all high risk and if you have ever had a claim to be settled with an insurance company you know, their forte is to find loopholes to why they don’t need to pay), thus enabling to offer cheaper packages to the farmers. 15/
Should the claims exceed the accruals, their partners would step in. Their partners like @acreafrica share the risk and make the model of Etherisc viable. Etherisc enables different companies to offer localized insurance products while utilizing the technology platform 16/
Etherisc has created and for Etherisc to reach further, utilizing local synergies and reducing their risk exposure - a win-win situation. @liesdorn explained that the flight delay insurance is not backed by reinsurance or partnerships similar to Acre Africa but that is okay - 17/
the claim scenarios around flight delay are actually small(ish). Delays caused by something which is out of human control are usually not covered and the maximal amount which can be claimed are capped to flight duration, etc. I’m EU based so this is more or less where I can 18/
comment. Flight Compensation Regulation is a regulation in EU law establishing common rules on compensation and assistance to passengers in the event of denied boarding, flight cancellations, or long delays of flights. It requires compensation between EUR 250 - 600 depending 19/
on the flight distance for delays of at least 2 hours, cancellations, or being denied boarding from overbooking. Delays shorter than two hours means no entitlement to any compensation of any kind even if the delay was classified as non-extraordinary. Airlines must provide 20/
refreshments and accommodation where appropriate. (Regulation (EC) No 261/2004 https://eur-lex.europa.eu/eli/reg/2004/261/oj). Every country has similar regulations - google the respective legislation in the country you call home. Within this sector the risk is manageable and the adverse factors 21/
Can be calculated relatively straight forward. Due to this the needed accruals are better estimable and it would be easy for a provider to be seen as the bee’s knees by offering more than the legal requirements.
Please add if you know more, I got something wrong. 22/22
Please add if you know more, I got something wrong. 22/22
