Reinsurance is the process by which an insurance company protects itself against the risk of losses with other insurance companies.
Purposes of Reinsurance :
An insurance company opts for reinsurance as a part of its responsibility to cover various risks for the benefit of its policy-holders and investors. The major purposes of reinsurance are:
1. To protect against catastrophic events
2. To allow ceding company to assume individual risks greater than its size, and to protect the cedant against big losses
3. To help in making an insurance company's results more predictable by absorbing larger losses and hence insuring a smooth income
4. To reduce amount of net liability, and increase surplus for the insurance company.
Types of Reinsurance :
The various types of reinsurance include:
Proportional reinsurance (also called quota share reinsurance) is that kind of insurance where the reinsurer takes a definite percent share of each policy the insurer writes and then shares in the premiums and losses in that same proportion.
Non-Proportional Reinsurance (also called excess of loss reinsurance) is available if the loss suffered by the insurer exceeds a certain amount (called retention)
Glossary on terms related to Reinsurance:
There are certain technical terms which are related to reinsurance. Some of them are:
