Reinsurance contracts are those contracts in which one insurance company transfers its risk to another insurance company. Insurance companies which transfer the risk are known as ceding companies also, direct writers. Accepting company .i.e. the company which accepts the risk is also known as reinsurer.
Say for instance Mr. has a life insurance policy with an insurance company for Rs.10 crore and the insurance company wants to transfer 30% of the risk to a reinsurer then in case of loss direct writer has to pay the sum assured to X’s beneficiary and then claim for the 30% from reinsurer. Mr. X has no relation with the reinsurer. It has contract with the direct writer alone and direct writer is bound to fulfill his part of the contract in case risk happens and then claim for it from the reinsurer. It has a separate contract with the reinsurer.
Not all insurance players are in this business because the capital requirement is much higher than if the insurance company functions only in insurance. In India LIC, Lloyds of London are few reinsurers.
There are basically two types of reinsurance namely: a) facultative; b) reinsurance by treaty.
Facultative reinsurance is when all individual policies are taken into consideration and then a decision as to which policy needs reinsurance and what % of risk needs to be transferred. It is called facultative because it need not be covered by one company; it can be covered by multiple companies. What risks need to be transferred is decided by ceding company.
One major disadvantage of facultative reinsurance is accepting company goes by the underwriting standards or policies of the ceding company. Now if there is any fault in classification of risk and it has been put in the wrong risk category (referred to as risk basket), then the loss may be suffered by the reinsurer too. Now a days, in order to have a better coverage or protection, now a days, reinsurance companies have started involving themselves in the underwriting process of the ceding company.
Reinsurance by treaty is when there is an agreement between direct writer and the reinsurer. Reinsurance companies come up with proposals to the direct writers as to what is the maximum amount of risk they are ready to accept and what kinds of risks they are ready to accept from the direct writers. The direct writers choose the best offer and they enter into agreement. Reinsurance by treaty is basically of two types; namely:-
It’s not always on an individual basis, it is always consolidated. Direct writer transfers some percentage and keep certain percentage of risk. Here the percentage is fixed.
Here 3 aspects are looked into:
Risk excess of loss:-
In this case the reinsurer gives a proposal that it will give a cover of certain amount for loss suffered upto certain amount. Say for example: “Rs. 50000/- in excess of Rs.100000/-.”
Aggregate risk excess of loss
This is similar to risk excess of loss. Direct writer will have to wait for all the claims in a year, add it and if it exceeds the cover promised by the reinsurer, then upto the amount promised by the reinsurer loss will be covered.
Premiums in case of reinsurance
They are of two types of reinsurance;
The above article covers most of the aspects of reinsurance in detail. For any further queries refer to indianmoney.com.
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