Dependence on foreign insurance

Insurance companies cede part of their risks to reinsurers; thus, a reinsurance company is an insurance company's insurance company. This situation enables insurers to underwrite a larger amount of business than would otherwise be possible, by protecting them both from a series of small losses and from a single big loss arising out of a major catastrophe.

Dependence on foreign reinsurance is much more persistent than dependence on foreign insurance. With an increasing number of countries limiting or excluding direct foreign participation in national insurance markets and restricting the foreign ownership of insurance companies, international reinsurance is gaining in importance in the international arena. Even in countries where the insurance sector has been totally nationalized, dependence on foreign reinsurance cannot be eliminated altogether. This is particularly the case in developing countries, where the premium income is relatively small and where large risks cannot be covered by the premium receipts generated there. Developing countries are concerned about the cost of foreign reinsurance for two main reasons. The first is the cost in foreign currency and the second is the negative impact that excessive recourse to reinsurance has on the growth and development of the domestic insurance industry.