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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. By spreading risk, an individual insurance company can take on clients whose coverage would be too great of a burden for the single insurance company to handle alone. When reinsurance occurs, the premium paid by the insured is typically shared by all of the insurance companies involved.
Reinsurance can help a company by providing:
Risk Transfer - Companies can share or transfer of specific risks with other companies
Arbitrage - Additional profits can be garnered by purchasing insurance elsewhere for less than the premium the company collects from policyholders.
Capital Management - Companies can avoid having to absorb large losses by passing risk; this frees up additional capital.
Solvency Margins - The purchase of surplus relief insurance allows companies to accept new clients and avoid the need to raise additional capital.
Expertise - The expertise of another insurer can help a company obtain a proper rating and premium.
he practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The intent of reinsurance is for an insurance company to reduce the risks associated with underwritten policies by spreading risks across alternative institutions
The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. A reinsurance contract is a contract of indemnity, meaning that it becomes effective only when the insurance company has made a payment to the original policyholder. Reinsurance provides a way for the insurance company to protect itself from financial disaster and ruin by passing on the risk to other companies. Reinsurance redistributes or diversifies the risk or threat associated with the business of issuing policies by allowing the reinsured to show more assets by reducing its reserve requirements.
Reinsurance is the insurance of the risk assumed by the insurer. In other words the insurer transfers some part of the risk to another party who is reinsurer.
Transfer of risk in exchange of price (premium) = Insurance
Insurance of Insurance = Reinsurance
Insurance of Reinsurance = Retrocession
Insurance of a single object by more than one Insurance company sharing on a percentage basis = Coinsurance.
Reinsurance is basically a risk transfer mechanism, in which cedant (insurer) cede a portion of risk to reinsurer. Reinsurance is done when the insurer dont have enough capcaity to underwrite a risk or the single loss might place the insurer in liquidation and to save it from such financial burdens insurer reinsure themselves.More over above reinsurer there are retrocenaries which insure reinsurer as well. This works in a cycle.
Further, there are two main types of reinsurance covers.
1. Treaty ( include Quota Share, Surplus, Excess of Loss, Stop Loss, CAT XOL ). Insurer define a threshold and up to that level insurer is reposible for the loss and he has to pay it i.e. falls under his retention and above that level reinsurer is resposible for the loss. Working Layers are defined in it.
2. Facultative. each and everyone accept a portionof risk i.e. suppose insurer retain20 % of risk and the remaining80% is reinsured than in case of loss insurer is liable only for20% and the remaining80% will be recovered from the reinsurer.
If any body need further clarification feel free to consult.
Many thanks
Usman
Reinsurance is a laying off of substantial risk by insurance company to reinsurance companies and reinsures.i.e the insurance of insurer.
however I agree with all previous4 answers to the definition of reinsurance.
Thanking You
Insurance of insured risk where the insurer retains a part and cedes the balance of a risk to the reinsurer so that there is greater spread and reduced liability on the part of insurer