How Reinsurance Works

PLIA enters into contracts with private insurers to market pollution liability insurance to the owners and operators of the USTs located in Washington State. PLIA acts as the reinsurer for those private insurance companies. Reinsurance, in the case of the pollution liability insurance program, means that PLIA shares a portion of the cost of settling claims with the contracted insurance companies. ustdiagramThose insurers are required to provide pollution liability insurance coverage to owners and operators of petroleum USTs located in Washington State.  As the reinsurer, PLIA assumes part of the risk for each loss and insulates the primary insurer in the case of an exceptionally large loss.  In the case of a $1,000,000 policy, PLIA is responsible for settlements over $75,000.  The insurer is responsible for settlement of most claims while protected by the state from severe losses.

Following is a simplified example of the PLIA reinsurance concept:

  1. XYZ Insurance Company provides a pollution liability insurance policy in the amount $1,000,000 to Tony Tank-Owner in Toutle.
  2. PLIA reinsures $925,000 of the $1,000,000 policy. This means that XYZ Insurance Company is responsible for only the first $75,000 in coverage of a claim, and PLIA for costs over $75,000 up to the policy limit of $1,000,000.
  3. A commercial reinsurance company would charge about 70% of the primary insurance policy premium for assuming such a large portion of the risk. The result would be an insurance premium for Tony Tank-Owner that would be approximately twice as high. (Every insurance policy, whether auto, liability, homeowner, life or health, is reinsured. The additional cost associated with reinsurance coverage is just not normally apparent to the policyholder.)
  4. PLIA charges XYZ Insurance Company only 1% of the primary insurance policy premiums (not 70% or more) for taking such a large risk. PLIA requires XYZ to pass the reinsurance premium savings on to the policyholder. Thus, Tony Tank-Owner and other petroleum storage tank operators throughout the state pay lower pollution liability insurance premiums than they would without the benefit of PLIA assistance.