WE ALL KNOW WHAT INSURANCE IS. MOST INDIVIDUAL OR COMPANIES TAKE INSURANCE FROM DIFFERENT INSURANCE COMPANY TO PROTECT THEMSELVES FROM ANY FINANCIAL LOSS THAT MAY OCCUR IF THE SUBJECT MATTER IS DAMAGED OR LOST.
BUT CAN AN INSURANCE COMPANY ALSO BE AT RISK. YES IT CAN BE……THE REASON BEING IS THAT SOME RISKS ARE TOO HIGH AND THE COST THAT THE INSURANCE COMPANY HAVE TO PAY TO THE ASSURED MAY LEAD TO LOSS OR BANKRUPTCY OF THE INSURANCE COMPANY. HENCE MANY TIMES INSURANCE COMPANIES INSURE THEIR RISK WITH SOME OTHER INSURANCE COMPANIES.
THIS PROCESS IS CALLED REINSURANCE. HENCE IT CAN BE DEFINED AS:
REINSURANCE IS AN INSURANCE THAT AN INSURANCE COMPANY PURCHASE FROM ANOTHER INSURANCE COMPANY TO INSULATE THEMSELVES FROM THE RISK OF A MAJOR RISK EVENT.
THE COMPANY ISSUING THE REINSURANCE IS CALLED A REINSURER. THE INSURANCE COMPANY PAYS PREMIUM TO THE REINSURER AND IN RETURN THE REINSURER PAYS A PART OF THE CLAIM INCURRED.
THERE ARE TWO TYPES OF REINSURANCE:-
- FACULTATIVE REINSURANCE: THIS REINSURANCE IS THE ONE IN WHICH ONLY ONE RISK IS COVERED IN A PARTICULAR CONTRACT. IF MORE THAN ONE RISK IS TO BE INSURED THEN EACH RISK IS INSURED SEPARATELY. AND FOR EACH RISK UNDER-WRITER HAVE TO DO SEPARATE EVALUATION OF THE RISK. ADVANTAGES : A) RISKS ARE CONSIDERED INDIVIDUALLY. B) THE FREEDOM TO OFFER ANY RISK(INSURER) WHICH MAY BE ACCEPTED OR DECLINED (REINSURER) C) THE INSURER MIGHT BENEFIT FROM SPECIFIC KNOWLEDGE ON PART OF THE FACULTATIVE REINSURER. DISADVANTAGES: A) INSURER CANNOT REPLY ON THE SUCCESSFUL PLACEMENT OF THE RISK. B) ADMINISTRATION INVOLVED IS COMPLICATED AND EXPENSIVE. C) DETAILED RISK AND LOSS INFORMATION HAS TO BE DISCLOSED. D) IF THE INSURER ARRANGES SURVEY, REINSURER MIGHT BE OBTAINING BUSINESS AT ADVANTAGEOUS TERMS.
- TREATY REINSURANCE: THIS REINSURANCE IS THE ONE IN WHICH SPECIFIED SHARE OF ALL THE RISK OF THE POLICY IS INSURED IN A SINGLE CONTRACT. ADVANTAGES: A) THE REINSURER CANNOT DECLINE TO ACCEPT ANY CESSION COMING WITHIN ITS SCOPE. B) THE RISK COMMENCE SIMULTANEOUSLY WITH THAT OF THE CEDING INSURER UNLIKE FACULTATIVE WHERE THE REINSURANCE COVER OPERATES ONLY FROM THE TIME THE REINSURANCE ACCEPTS THE RISK. C) LESS CLERICAL WORK AND COST. D) RIGHTS AND OBLIGATION OF EACH PARTY IS CLEARLY DEFINED. DISADVANTAGES: A) NOT SUITED FOR THE RISK OF VERY HIGH LIABILITY OR COMPENSATION.