As mentioned earlier
reinsurance is nothing but a sub
insurance , When an insurer transfer
apart of his risk on a
particular insurance by insuring it with another insurer or other
re insurer, it is termed as a “ Reinsurance “ Reinsurance means insuring again by the insurer of a risk
already insured . Every insurer has a limit to the risk that he can bear. If at
anytime a profitable venture comes his
way , he may insure it even if the risk involved is beyond his capacity which is his retention limit. In such cases ,
in order to safeguard his interest he may reinsure the same for an amount in
excess of his retention limit which other
insurers, so that the loss due to risk is spread over many insurers.
Reinsurance is, therefore a contracts between two insurers and the original contract or the
insured is not at all affected by it.
Now there contracts on the same subject
matter. The first contract is between the original insurer or direct insurer
and the owner of the subject matter or the original insured. The other contract reinsurance contract is
between the original insurer (also know as principal insurer or Re
insurance or ceding company). and the
reinsurer also known as guaranteeing
company. In the case of the loss on the
subject matter, the original insurer collects the insured sum from there reinsurer and ten settle the
loss value in full to the original
insured. An example will make the concept if reinsurance more clear as to how it works in actual practice
. Suppose X a factory owner approaches
an insurance company Y for the
insurance for an amount say Rs. 80 crores., Looking to the financial position Company Y
consideration to retain Only Rs. 30 crores . Company Y can deal this proposal in two ways. The
first is to decline the risk which is beyond his financial capacity and the other is to accept it for
the whole amount and approach the other
insurer for the excess of his own limit I, e
for balance of the Rs. 50 crores . The excess for which he approached to
the other insurer is called is that. reinsurance .
DEFINITIONS OF REINSURANCE:
(1). PROF R. S. SHARMA: When an insurer
transfer a part of the risk on a particular policy by the insuring it with some
other , it is called reinsurance ,:. (2). W. A. DINSDALE: When the amount the any risk of the risks from one hazard is such that it is necessary to effect re-insurance ., (3). FEDERATION OF INSURANCE INSTITUTE MUMBAI :
Reinsurance is an arrangement whereby an insurer who has accepted an insurance ,
transfers a part of the risk to another
insurer so that the his liability on any one risk is limited to a figure proportionate to his financial capacity.:’ (4).REIGAL & MILLER:
Reinsurance is that the transfer by it is a an insurance company
or a of a position of its risk to another company .
CHARACTERISTICS OF REINSURANCE - From the above
definitions one can observe the
characteristics of reinsurance : (1). Reinsurance is a contract between the two insurers. (2). It belongs to the class of liability insurance and its undertakes or secures the risk of liability of the
direct reinsurer only. The reinsurer
shall never be liable to the original insured. (3). Reinsurer is liable only
for the risk or any part of the a risk as expressly mentioned in the reinsurance contract., (4). The fundamental principles of
insurance such as a insurable interest
utmost good faith, indemnity ,
subrogation , proximate clause also, apply to reinsurance ., (5).
Reinsurance can be restored to in all
types of insurance . (6). The insured has to make claim from the original insurer in the event of the
of a loss as he has no direct contact
with the reinsurer., (7). Original insurer cannot insure the risk with a
reinsurer more than the sum assured originally
by the insured. (8). The direct insurer is indemnified only when a
liability has been created on account of
the loss of the original insured. (9). The contract or reinsurance is in fact co-extensive with the original contract. For example
if for any reason the original contract come to an end or is
avoided the contract of reinsurance also comes to an end. (10). On payments of
the loss under the policy of the
reinsurance , the reinsurer is subrogated to all rights if the of the original
insurer which may include the rights of
the insured to which the original insurer is subrogated.
REASON FOR TAKING
REINSURANCE: The following are the reasons for which reinsurance is taken: (1). SPREAD OF RISK: An insurer will wish to relieve himself from
uncertainty of loss. By spreading the risk of loss, the insurer will have
security and peace of mind. (2). STABILITY:
Reinsurance helps to avoid
fluctuations in claims from year to
year. (3). CAPACITY: Every insurer will have a financial limit on the size of the loss it
will be prepared to accept. By purchasing
reinsurance , the insurer can accept all sizes of the risks in the
knowledge that it can reinsurer any part
of the loss which it is the feels is too
large.(4). CATASTROPHE: The
possibility of complete catastrophe and numerous
by special the catastrophe agreements with a reinsurers. (5). TECHNICAL SERVICES: Reinsurance
have experiences in dealing with the largest and most difficult risks. They can be provide information to insurers and
often become involved in researching new
areas of the market on behalf of a number of their clients. DEFINITIONS OF
TERMS USED: For the proper understanding of
reinsurance various special terms used
are explained below: (1). CEDING COMPANY
REINSURED: The original insurer who seeks to again reinsurer a apart of
the risk insured is the ceding company. also called the Reinsured . (2). REINSURER: The insurer who provides reinsurance
cover to the ceding company is called the Reinsurance . The offer made
by the ceding company is accepted by the
reinsurer. The Reinsurer may be the a direct insurer who in addition to
accepting direct business, also accepts reinsurance , business, or (b), a
professional reinsurer who only reinsurance , business but also not transact direct business,. (3). RETENTION: Retention is the amount of maximum liability which are
the original insurer can assume for a
particular risk. In other words, if the original insurer can assume for a particular risk. In other words, if the
original insurer, looking to his
financial status feels that the Rs.,
2,00,000 under each proposal is the retention limit that he can accept
under any proposal up to this limit and for excess, seek reinsurance . The
other factors which may the affect the retention limit, are the size of the company, type of the policy and the
class of risk. (4). CESSION : The amount
given the off by the way of the reinsurance
and, therefore the amount accepted by the reinsurer, a reinsurance : an
amount ceded as reinsurance . (5). RETRO CESSION: Reinsurance may themselves reinsurer and the amount of the risk give away is
termed as “ Retro cession”:. (6).
SURPLUS: This refers to the differences between the sum insured under the policy issued by the ceding company and
its retention