What Does Bordereau Mean?
A bordereau is a document produced by an insurance company that either lists information about a high-value asset (ownership names, contact info, period covered) or claims paid for one particular risk during a time period. This document is given to a reinsurer.
A reinsurer is essentially the insurance company for the insurance company. Reinsurers are used when the cost to pay out a certain type of claim is so high that it would bankrupt a single company. Instead, reinsurers will come together and agree to cover part of the losses to lessen the impact on the original company.
A bordereau is part of the reinsurance contract. It presumes that, since the original company knows more about the risks it has passed on to the reinsurer, it is responsible for periodically updating the reinsurer about its financial status (losses made, premiums paid) and other pertinent information. The bordereau will contain either all of the items protected under the contract or a detailed record of how many claims have been made for that risk in a particular period. Meanwhile, the reinsurer audits the report to inform its future decisions, such as knowing what risks should be reinsured based on profitability.
An example of a risk that would be too great for one single insurance company to cover would be an earthquake. If a single insurance company insured all the homes in an area, and that area was devastated by an earthquake, the insurance company would go bankrupt trying to pay out all the claims. However, the insurance company can spread the responsibility of the coverage to other insurance companies (reinsurers) to spread the financial loss, ensuring the financial health of them all. This type of reinsurance is known as treaty reinsurance.
Insuranceopedia Explains Bordereau
“Bordereau” is a French word that means “border,” “slip” or “margin.” Not every reinsurance contract has a bordereau — sometimes it only requires an accounting summary. For example, where the bordereau would list the details about a commercial building and what is covered, an accounting summary would just provide a numeric overview of profits and losses.
The purpose of insurance is to spread the losses of the few among many. The way this works is that customers (the many) pay their insurance premiums into one large pot. When one of the customers has a claim (the few), the insurance company uses the money from the pot to pay out the claim. When the pot gets too low due to claim frequency, the insurance premiums go up. The same concept applies with reinsurance — if there is a chance the pot will get too low, the insurance companies will call on their reinsurers to share in the loss so it is not as devastating.
There are two different types of reinsurance: treaty reinsurance and facultative reinsurance. With treaty reinsurance, the reinsurers may cover one specific risk on a group of standard policies. For example, a reinsurer may cover just the medical claims for all the auto insurance policies and another reinsurer may cover all the legal expenses. With facultative reinsurance, the reinsurers involved would share the risk of any claim on one item. For example, a commercial building worth many millions of dollars may be too expensive for a single company to insure, so they will call their reinsurers to share in the risk and the potential profit for that one building.
These reinsurers usually agree to cover only a small percentage of the losses. For this reason, there may be many reinsurers involved. These reinsurers benefit by also participating in the profits made on the original policy. If a claim does not occur, they can take a portion from the premium collected on the original policy.