Reinsurance: Creating Value & Risk Management

- by Jaya Nema *

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Introduction

The concept of Reinsurance, though known, is still a less popular one in Insurance Industry and even general policy-holders are not very familiar with this term. An insurance company uses this tool to transfer a portion to one or more insurance companies. In a general language, Reinsurance is a process in which an insurer transfers certain percentage of its business risk to another company, which will then reimburse the loss that insurer may face in his business. It makes the risk management process of insurance companies more effective and economical.

Reinsurance is a transaction in which one insurer agrees for a premium, to indemnify another insurer against all or part of loss that insurer may sustain under its policy or policies of insurance. The company purchasing the reinsurance is known as the Ceding Insurer (or Primary Insurer) and the company selling reinsurance is known as the Assuming Insurer (or simply Reinsurer). The transaction is also described as "The Insurance of Insurance Companies". It is a risk management tool that spreads the risk so that no single entity has to bear the burden of paying back beyond the limit. Reinsurance companies indemnify a certain percentage of the losses which the primary insurer is unable to pay or the amount of loss is beyond the capacity of the primary insurer.

Reinsurance process can be presented diagrammatically as below: -

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* Contributed by: -
Jaya Nema,
Faculty - MBA (Finance & Marketing),
Laxmi Narain College of Technology, Indore.

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