‘Reinsurance is the shifting of part or all of the insurance originally written by one insurer to another insurer” (Brown & Churchill 1999)
Once insurance operations have become formalised and there is adequate training of staff, the immediate need for the micro-insurance provider is to obtain reinsurance cover. Reinsurance enables companies to grow beyond the restrictions of their reserves, it stabilises financial results against unexpected claims, protects against catastrophic losses, facilitates access to new technologies and provides increased risk cover to the policyholder. In the first few years of operations the solvency of the micro-insurer is at its most vulnerable, reinsurance allows claims to be paid quickly and underwriting experience to be achieved, whilst still maintaining premium levels and enhancing the credibility of the scheme (Ripoll 1996, Brown & Churchill 1999, Brown & Churchill 2000).
Many developing countries require reinsurance to be placed with local reinsurers due to political considerations and foreign exchange policies, however, domestic players are able to provide minimal retention capacity (Outreville 1996, Matringe 1997, IDB 1977). The absence of futures markets and reinsurance companies would normally leave the state responsible to bear the risk (Matringe 1997). Unfortunately in developing countries the government does not have the capacity to compensate for a natural disaster. Consequently, they have to rely on external aid and post disaster funding to cope with the consequences of these events, but these sources are also becoming limited in supply against growing demand (Pollner 2001). There is a need to transfer this risk onto the international insurance and reinsurance markets. International reinsurers are more diversified than local reinsurers, but here too the frequency of global catastrophes mean that available reinsurance is also short in supply and quite expensive (Pollner 2001, Outreville 1996). Consequently, many newly established (formalised) micro-insurers are finding it very difficult to obtain adequate and affordable cover locally and internationally (Matringe 1997). Even when a