What is Reinsurance? Nature,Objectives and Regulation

Concept of Reinsurance

Reinsurance is a contract between two more insurance companies by which a portion of risk or loss is transferred to another insurance company. This happens when an insurance company has undertaken more risk burden on it shoulders than its bearing capacity. Thus, it is a device to reduce the risk. Reinsurance is an insurance of insurance. In a contract of reinsurance, insurer who has accepted an insurance much bigger than he can conveniently bear lays-off whole or part or the risk with another insurer and thus, reduce his own ultimate liability. Therefore, in reinsurance one insurer insures the risks, Which he had undertaken with another insurer.

Retention: It is the amount of maximum liability, which the original insurer can assume for a particular risk.

Ceding Company: It is the original company who willingly transfer part of risk to other company.

Nature of Reinsurance

  1. The purpose of reinsurance is to spread or share out the loss.
  2. Reinsurance contract is made on the same terms and conditions that govern the original contract of insurance.
  3. If the original insurance lapses for any reason, reinsurance may also be terminated.
  4. An original insurer has insurable interest upon the amount of the risk undertaken by him. Therefore, he can re-insurance the subject-matter to that extent.
  5. On the occurrence of the loss, the original insurer has to pay the assured amount to the insured and only then he will be entitled to claim his share of the liability from the re-insurer.
  6. In the absence of a legally accepted contract between the original party who has insured his subject-matter and the original insurer, the re-insurers are obviously, discharged.
  7. The re-insurer is not liable to the original insured in the event of loss as there is no agreement between the two.

Objectives of Reinsurance

  1. Wider distribution of risks to secure full advantages of the law of averages and to safeguard the interests of the insurers.
  2. Limitation of liability of the insurer to an amount when it is within his financial capacity.
  3. A safeguard against serious effects of uncertainties.

Advantages of Reinsurance

  1. It is a security for the insurers. He can share his risk with other insurers.
  2. It reduces the situations of uncertainty by distribution of risks among other insurers.
  3. It increases the capacity of the insurer to undertake insurance of larger sums without any hesitations.
  4. The re-insurer can contribute to designing the product,pricing and marketing new products. It can also offer back office support such as faster claims processing and automation of operations.

Regulation of Reinsurance

  1. Every insurer should retain risk proportionate to its financial strength and business volumes.
  2. Certain percentage of the sum assured on each policy by an insurance company is to be reinsured with the National Re-insurer. National Re-insurer has been made compulsory only in the non-life sector.
  3. The reinsurance program will being at the start of each financial year and has to be submitted to the IRDA, forty-five days before the start of the financial year.
  4. Private life insurance companies cannot enter into re-insurance with their promoter company or its associates,through the LIC can continue to re-insure its policies with GIC.
  5. The objective of these regulations is to expand retention within India, ensure the best protection for the re-insurance costs incurred and simplify administration.