Reinsurance can be defined as insurance made for insurers. Reinsurance helps insurers to escape from those risks that they cannot absorb or they do not wish to take. Insurance companies usually insurers a portion of their risk with some specialist insurers. In such case the insurer can recover a portion of the claim which is paid out from re insurer by them. Thus the risk associated with failure on the part of insurer in case of some natural disasters which brings about huge sum as claim will be reduced. Chance of failure on the part of insurer in case of huge claims is more when compared to individual claims.
Usually reinsurance companies have good fund and are very large with wide range of operation. It is with the reinsurance cover that solvency margin risk levels are adjusted by reinsurance companies. Reinsurance arrangements are mainly of two types, treaty reinsurance and facultative reinsurance. Thus the question ‘what is reinsurance’ gets clearer answers these ways.
In this method of reinsurance there will be separate arrangement for various types of risks underwritten by the insurer. This type of reinsurance is usually a division of an arrangement that is ongoing. In this type policies are offered continuously by the insurer to reinsurer and it is the discretion of reinsurer to make decision about acceptance of each policies either as individual or not. As this method involves great hard work it is considered as most expensive for practice by human resource.
This type of reinsurance is arranged as a whole for all the underwritten policies of an insurer. The business of the insurer is reinsured in whole or as a large part by the reinsurer in this method. Thus the work load of reinsurer becomes less for he need not scrutinize each individual policy. The insurer too benefits for he need not provide the details of each policy to reinsurer and about the risks underwritten by him in each policy.
Agreement of reinsurance can be made on the basis of stop loss or prorate.
Pro Rata Basis: In this method reinsurer will be given on covered risk a portion of premium where such portion of premium is fixed. Out of the claims made a fixed proportion is paid in return.
Stop Loss Basis: In this method retention is made by insurer as absorption of any loss incurred and above this limit any loss occurred is absorbed by reinsurer.
In reinsurance losses occurred above a particular limit or size is the only thing covered and this is the individual risk above that particular limit or size of loss incurred. Thus reinsurance is not for the whole insurance coverage, but for the individual losses that occurs above a particular limit. Thus the question ‘what is reinsurance’ can be addressed properly so that the concept of reinsurance gets spread to almost all sorts of people who avail reinsurance and achieve the benefits of it.