Reinsurance is a process by which an insurance company insures an asset with another insurance company after it has collected premium and assumed the risk of the asset from the first party who had applied for the insurance cover of the asset. It can be called second level insurance. The insurance company (Insurer) want to insure and protect itself from liabilities. So, it approaches another insurance company and shares the risk of underlying asset with insurance company through a process called Reinsurance.

Reinsurance helps an insurance company to assume more risks than what it’s capital base and the accrued surpluses would normally allow it. If the Reinsurance contract involves more than one reinsurer, one company assumes the role of a Lead Reinsurer with other companies subscribing to the contract with the lead insurer.

The Reinsurance contract is a contract of indemnity, it means the amount will become payable only after the original insurer has paid the claim to the insured. An insurer can reinsure the underlying asset with more than one reinsurer. The premium of the reinsurance asset will be smaller than the original insurance premium. The original policy holder does not have any contractual agreement with the reinsurer.

The two types of Reinsurance products are Quota share and Excess of loss. They can vary in the manner, in which risk is shared between the Insurer and the Reinsurer. Retrocession it is the process by which the company that has accepted the reinsurance from different companies want to spread their risk with other companies. There are certain rules followed with reinsurance contracts. The important ones are: the Law of Utmost Good Faith deals with the disclosure of all material facts while entering into a contract. The Law of Follow the Fortunes directs the Reinsurer to discharge its responsibilities in terms of payment to the Insurer once the insurer has paid a particular claim to the original policy holder.

Post a Comment