Re-insurance is insurance for insurance companies. This refers to a contract of insurance for the second time. It is also known as insurance for insurers or stop-loss insurance. Under the agreement, in consideration of a certain premium, his original insurer shifts the part of the risk on insurance on the shoulders of another insurer or insurance company so that the possible loss may be widely distributed. It is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim. In other words, it protects insurance companies from financial ruin, thereby protecting the companies’ customers from uncovered losses.
Reinsurance is a form of insurance purchased by insurance companies in order to mitigate risk. It reduces the net liability on individual risks and catastrophe protection from large or multiple losses. It’s a way of transferring or “ceding” some of the financial risk insurance companies assume in insuring cars, homes, and businesses to another insurance company, the reinsurer. The practice also provides ceding companies, those that seek reinsurance, the capacity to increase their underwriting capabilities in terms of the number and size of risks. It is the mechanism that insurance companies use to lower their risk or reduce their exposure to a specific catastrophic event. It refers to the insurance taken up by an insurance company to mitigate heavy losses when it does not wish to bear the entire risk of loss and thus shares it with some other insurer.
There are two main categories of reinsurance: treaty and facultative.
- Treaty reinsurance agreements cover all or a portion of an insurer’s risks, and they are effective for a certain time period.
- Facultative coverage insures against a specific risk factor. The underwriter would evaluate the individual risk factor and write a policy accordingly.
Benefits
Re-insurance means insurance taken up by an insurance company when it does not wish to bear the entire risk of loss and thus shares it with some other insurer. By covering the insurer against accumulated individual commitments, reinsurance gives the insurer more security for its equity and solvency by increasing its ability to withstand the financial burden when unusual and major events occur. The premiums are fixed in such a manner that the total premium collected would be enough to pay for the total claims incurred after providing for expenses. It is to avoid such risks that insurance companies take out policies.
