Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit the total loss the original insurer would experience in case of disaster. In other words, it is a form of an insurance cover for insurance companies.
Roles or importance of Reinsurance –
Reinsurance spans the diversity: Reinsurance is governed by the same principles as for insurance. But instead of covering property or casualty risks directly, the reinsurer insurer’s insurance companies. Reinsurance spans the diversity of situations specific to each type of insurance and is consequently more complex and much broader in range. Since it covers the whole world.
Reinsurance transfers risks to many insurance companies: An insurance company issues contracts called policies. The insurance company is the direct or primary insurer of an individual or a business. The policy is written in its name, making it liable for all claims arising under the policy. The insured deals excessively with the insurance company, but the insurance company spreads its risks arising under the policy by transferring all or part of those risks to one or more reinsurance companies. In the event of a claim, the insurance company must pay to the insured the full amount of compensation due under the policy. It is then up to the insurance company to recoup the sums corresponding to the risk transferred from its reinsurers. At the beginning of each year, the insurance company takes out contracts with one or more reinsurance companies to cover if for policies, issued to its customers for the year in question. Reinsurers in term usually cede a share of the risk they accept to other reinsurers known as retro cessionaries this system is roughly equivalent to bank syndicates.
Dealing with an exception situation:
Reinsurance enables direct writing companies to an event out their results when Major, exceptional, losses occur a hurricane or an earthquake for considerably reduces this type of potential imbalance.
Increase the capacity of the direct insurer:
Insurance companies use reinsurance to increase the maximum amount they are able to cover as the primary insurer for any given potential loss or category, in other words, their available capacity is increased. As a result insurance Companies can write more risks or larger risks without becoming overextended.
Ensuring safety and profitably:
Reinsurance also provides insurers with the large amounts of cash needed in the event of a major loss, which enables them to manage their assets safely and profitably. In addition to the above set-vied, the reinsurance companies also provide the following advisory services to their ceding companies.