Re insurance

Reinsurance can be defined as insuring the insurer just as an individual wants to spread the risk of loss an insurer will need similar protection and will seek reinsurance for the largest and most difficult risks or will seek to cover his whole account to protect himself against unexpected losses and catastrophes.

 Actually reinsurance is the shifting of part of all of the insurance originally written by one insurer to another insurer. The insurer that initially writes the business is called the ceding company. The insurer that accepts part or all of the insurance from the ceding company is called the reinsurer. The amount of insurance retained by the ceding company for its own account is called the retention limit or net retention. The insured has no involvement in the contract for reinsurance. The reinsurance agreement is between the insurer and the reinsurer. The reinsurer has a claim only against the insurer. The insured will be unaware of any reinsurance agreement.

Reasons for reinsurance

 The main reason why an insurance company will seek reinsurance are summarized below

1.       Spread of risk: an insurer washes to relieve itself from uncertainty  of loss more than it can bear. So they reinsure some of business and spread the risk of loss. In this way the insurer has security from excess risks.

2.       Stability: reinsurance helps to avoid fluctuation in claims from year to year.

3.       Capacity: every insurer has a financial limit on the size of loss it prepares to accept. By purchasing reinsurance the insurer can accept all sizes of risk in the knowledge that it can reinsure any part of the loss which it feels is too large.

4.       Catastrophe: the possibility of complete catastrophe and many claims from one event such as an earthquake can be protected against by special catastrophe agreements with a reinsurer.

5.       Status: the government authority wants to ensure that adequate reinsurance arrangements exist under the insurance act. Hence reinsurance may be compulsory by law in some cases. It is for the security of public wealth and confidence over insurance business.

6.        Technical services: reinsurer has experience in dealing with largest and most difficult risk. they can provide information to new and inexperienced insurers who are often researching new  areas of the insurance market.