Reinsurance Recoverables

What Are Reinsurance Recoverables?

The term reinsurance recoverables refers to the portion of an insurance company’s losses from claims that can be recovered from reinsurance companies. They include the amount owed to the insurer by the reinsurer for claims and claims-related expenses, the amount owed for estimated losses that have occurred and been reported, the amount of incurred but not reported (IBNR) losses, and the number of unearned premiums paid to the reinsurer.

Reinsurance recoverables can cover claims and related expenses, estimated and reported losses, and unearned premiums.

Understanding Reinsurance Recoverables

Insurance companies primarily make money from their underwriting activities. When an insurer underwrites a new policy, it collects premiums from policyholders. But it also takes on the liability associated with providing the coverage. Insurance regulators require insurers to set aside reserves to cover potential claims made against the policies that the insurer underwrites.

The insurer will find its underwriting activities limited by how much risk it can handle. One way an insurer can reduce its risk exposure is by sharing some of this risk with reinsurance companies. Essentially, the insurer purchases insurance to cover a risk when it sells insurance policies to a reinsurer. That reinsurer agrees to cover some of that risk in exchange for a portion of the premiums the original insurer collects from the insured parties.

As noted above, a loss that can be recovered from a reinsurance company is called a reinsurance recoverable. The reinsurer agrees to reimburse the original insurer for losses associated with the risk that it takes on. The recoverable is, therefore, the amount paid by the reinsurer to the original insurer or the ceding company. Put simply, it's the amount of money an insurer gets from a reinsurance company for claims it had to pay out to its clients. Some companies also refer to reinsurance recoverables as reinsurance receivables.

Since selling policies to a reinsurer often means a reduction in liabilities, reinsurance recoverables are considered an asset for the original insurance company. Having said that, they can be among some of the largest assets on the original insurance company's balance sheet. In some instances, primary insurers keep collateral from reinsurers to be able to recognize the recoverable as an asset. Reinsurance recoverables become a liability for the reinsurer, though. That's because there's a possibility it will have to make a payout on the policies if the underlying insured parties file a claim with the ceding company.

Special Considerations

Different companies in different businesses purchase various levels of reinsurance, according to their individual risks and market conditions. While reinsurers historically covered only nonlife risks, they've recently taken an interest in reinsuring life risks, which has driven growth. 

While using reinsurers can help insurance companies reduce their risk exposure, it can leave the insurer open to new types of risk. A company that is over-reliant on reinsurers can find itself in a difficult situation if reinsurers start demanding higher fees. The insurer also runs the risk of the reinsurer not being able to pay for the settlements to which it has agreed. Insurers with large reinsurance recoverables to policyholders’ surplus may find that a portion of the reinsurance recoverables is uncollectible. 

Types of Reinsurance Recoverables

Recoverables can come in many forms, so there are no boundaries as to the types of claims a reinsurance company can pay. It all depends on the type of policies the original insurance company sells to the reinsurer. These include life insurance, vehicle insurance, natural disaster policies that cover events like floods and fires, and malpractice insurance.

A reinsurer can assume the responsibility to pay for claims and any other claims-related costs such as unearned premiums, as well as losses — both reported and estimated. Recoverables may also cover losses that have been incurred but not yet reported.