Bielikova О., Mudrenko А. А.

Oles Honchar Dnipropetrovsk National University


Reinsurance is one approach for coping with financial risks, since it spreads risk among a group of insurers.

Insurers seek to reinsure for two primary reasons: to protect their financial assets from unforeseen losses from high–cost cases and to underwrite more risks than they could by relying on their own surplus.

Insurers face financial risk even after pooling individual risk because rare high – cost events could still bankrupt a scheme. In the United States in 1987, 1 percent of the population accounted for 30 percent of total health expenditure, while 50 percent of the population spent only 3 percent of total health expenditure.

Risks can be mitigated by enrolling a large enough population so that, in the aggregate, the magnitude of these expenditures can be anticipated. In small schemes, however, the ability to predict financial losses is limited.

For community–based schemes, the most common sources of unpredictable financial risks are epidemics and disease outbreaks that result in much higher than predicted utilization of health services. For instance, malaria epidemics in Uganda around the Kisiizi, Ishaka, Bushenyi, and Nyakibale Hospital Schemes have had a big financial impact.

 An evaluation of these schemes recommends some form of reinsurance to cope with these losses. The treatment and care of HIV/ AIDS patients in another high – cost and somewhat unpredictable need. The growing prevalence of HIV/ AIDS in rural areas, particularly in Sub – Sahara Africa, represents a high–risk scenario for health insurance schemes, unless a mechanism such as direct subsidies or reinsurance is established to handle treatment cots.

Reinsurance is provided through one of the following mechanisms. First, some companies focus exclusively on reinsurance, operating outside the organization seeking to transfer risk.

Second, a primary insurance may have reinsurance branches or departments, as do large insurers with multiple products.

Finally, associations or cooperatives may provide reinsurance.

Usually, the establishment of a national reinsurance company in a developing country is associated with a system of compulsory cessions from the primary companies operating in the market. The quota – share system (redistribution of proportional business) is the most suitable in these countries, at least during initial market development.