Reinsurance is the process by which an insurance company protects itself against the risk of losses with other insurance companies.
Purposes of Reinsurance :
An insurance company opts for reinsurance as a part of its responsibility to cover various risks for the benefit of its policy-holders and investors. The major purposes of reinsurance are:
1. To protect against catastrophic events
2. To allow ceding company to assume individual risks greater than its size, and to protect the cedant against big losses
3. To help in making an insurance company’s results more predictable by absorbing larger losses and hence insuring a smooth income
4. To reduce amount of net liability, and increase surplus for the insurance company.
Types of Reinsurance :
The various types of reinsurance include:
Proportional reinsurance (also called quota share reinsurance) is that kind of insurance where the reinsurer takes a definite percent share of each policy the insurer writes and then shares in the premiums and losses in that same proportion.
Non-Proportional Reinsurance (also called excess of loss reinsurance) is available if the loss suffered by the insurer exceeds a certain amount (called retention)
Glossary on terms related to Reinsurance:
There are certain technical terms which are related to reinsurance. Some of them are:
Admitted Reinsurance – A company is eligible as admitted when it has been licensed and accepted by governmental insurance authorities of a state or country
Arbitration Clause – It is a language which provides a means of resolving differences between the reinsurer and the reinsured without litigation
Burning Cost – A term used in spread loss property reinsurance
Catastrophe Reinsurance – A kind of reinsurance that indemnifies the ceding company for the accumulation of losses in excess of a stipulated sum caused by a catastrophic event
Cede – When a company reinsures its liability with another, it is said to be ceding its business
Ceding Company – The insurance company which purchases reinsurance
Ex Gratia Payment – A payment made for which the company is not liable under its policy terms
Facultative – Reinsurance of individual risks by offer and acceptance
Lead Reinsurer – The reinsurer who negotiates the terms, conditions, and premium rates and signs on to the slip first
Peril – It refers to the causes of possible loss in the property field like for example, fire, hail, etc.
Retrocession – A reinsurance of reinsurance. It is a transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has assumed before.
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