What is reinsurance?
We have seen how many natural insurance companies there will be. They are sharing a common risk with a large number of people i.e. risk pooling. However, it is interesting to know that even ATO Insurance buys insurance from the companies that sell you insurance. These insurance companies buy insurance to ensure that they are able to fulfill their obligations to customers. This process of an insurance company transferring its risk to another insurance company is called reinsurance. |
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The company to which the risk is transferred is called the coding company and the receptive company is called reinsurance. The reinsurer agrees to compensate the sedent in full or against any part of the loss that the primary insurance company has sold under the specific insurance policy that sold it. In return, the student pays a premium to the reinsurer. In addition, the coding company discloses all information required by the reinsurer to assess, prune and manage the risks covered by the reinsurance agreement. [insurance companies]
Let me give you an example:
Mr. Ram Kajivanbima INR's policy with an insurance company is Rs. 10 crores. The insurance company now wants to transfer the 30% risk back to the insurer. Then, in case of loss, the coding company will now have to pay full insurance for the beneficiary of Mr. Ram and ask the reinsurance company for the previously insured 30%. Mr. Ram or his benefactor has no connection with the reinsurance company. The life insurance contract is between Mr. Ram and the primary insurance company and thus the company is bound to settle the entire claim asked by Mr. Ram or the beneficiary. The contract between the coding company and the reinsurance company is different.Who guarantees reinsurance?
It is important to note that not all business insurance companies play reinsurers with other insurance companies. The capital requirement is much higher for settling the claims of a coding company.In India, General Insurance has been the sole reinsurer for more than four decades. However, the Insurance Regulatory and Development Authority of India (IRDA) has approved the first phase of ITI reinsurance licenses and thus opened up the Indian insurance market to the foreign sector.
The IRDA has again approved the initial approval of four global players in the insurance industry - known as the R1 regulatory parliament. Munich Ray and Hanover from Germany, Swiss Ray from Switzerland, and French reinsurance giant SCOR. There is an ongoing process to confirm the final license i.e. R2 to these global reinsurers and it may take some time. Munich Ray is the largest reinsurance company in the world, followed by Swiss Ray and Hanover. The US-based Reinsurance Group of America (RGA) and the UK-based XL Caitlin have also applied to operate in the Indian market. For a regular insurance company, there are three levels of exemptions but for reinsurance companies, there are only two levels. [insurance stocks today]
Who bought reinsurance?
We already know that primary insurance companies need reinsurance. However, there are some companies that buy insurance specifically to keep the business going. Reinsurers deal with coding companies, reinsurance intermediaries, multinational corporations, and banks.The business model of the primary insurance company decides how much the business needs to be insured. The company also considers its capital muscle, risk appetite, and evaluates the current market situation before buying reinsurance. Insurers, whose portfolios are widely exposed to natural or catastrophic disasters such as floods, earthquakes, etc., need the most insurance coverage.
Although smaller players may require larger reinsurance coverage due to the variability of insurance risk coverage and a larger client base. More reinsurance coverage is needed than with different types of clients with a specific line of work or in specific client organizations. In the case of commercial portfolios, even if the number of risks is low (aviation industry or utility industry) the exposure is very large and such companies need more reinsurance cover.
In most cases, companies re-seek insurance cover to benefit from the insurance company’s expertise and financing, while the coding company expands its product range or relocates to a new geographic area. [best life insurance stocks]
Types of reinsurance:
There are two types of reinsurance:Consistent reinsurance
Consistent reinsurance is the type of reinsurance that covers a single risk. It is considered to be more transaction-based. Well-organized reinsurance allows reinsurance to assess individual risk and take a call on whether it accepts or rejects it. The profit structure of the reinsurance company plays a role in deciding which risk to take a. In such a contract, the cladding company and the reinsurer produce an accompanying certificate stating that the reinsurer is taking a certain risk. This type of reinsurance can be more expensive for primary insurance companies.
Reinsurance contract
Within this category, the reinsurer agrees to accept all of the specific types of risk from the primary insurance company. In the contract agreement, the reinsurance company is obliged to take all the risks mentioned in the contract. There are two types of contract agreements:Quota or Quota Share:
It is a consolidated risk-sharing type of company that reassigns some percentage of the risk to the insurer and keeps a certain percentage to itself. Percentage specified in the given contractSurplus insurance:
Three aspects can be noticed:- What is the maximum cover the reinsurance company is ready to accept?
- What is the maximum loss (amount for life insurance) and compensation assessment for general insurance)?
- What is the percentage of risk of relocation?
How are the risks covered?
There are two agreements through which the reinsurer covers the risk in a given contract:Risk of additional damage
The reinsurer offers the coding company a certain amount as a cover in case of loss up to a certain amount. As such the reinsurance company agreed to pay INR 50,000 for losses over INR 100,000.Excessive loss of aggregate loss
This is similar to the description above but here, the primary insurance company has to wait for all the claims in one year, add all of them and if the calculation exceeds the cover promised by the reinsurer, the promised amount will be covered.
Reinsurance premium
There are again two types of premium payments:
Original premium or direct premium
If you say that 30% of the risk is transferred to the reinsurer, then 30% of the premium received by the primary insurance company is transferred directly to the reinsurer.Revised risk premium
The reading company does not care what the caching company charges their client for the premium. It informs its own premium sedans to cover certain risks.Reinsurance facility
- Reduce the instability of underwriting results.
- There is flexibility in financing and there is also capital relief.
- Cladding companies can access the reinsurance company's skills and services, especially in the areas of pricing, underwriting, product development, and claims.
These benefits apply to both life and non-life insurance. However, due to the different approaches of primary insurance companies, the importance of these benefits may vary in different sectors.
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