Meaning and Purpose of Reinsurance
Reinsurance: This means insurance by which a first insurer relieves him from the risk and devolves the risk upon another insurer. Meaning and Purpose of Reinsurance
Therefore, reinsurance is to ensure again a risk that had already been insured.
The person who does the insuring is an insurer while the person who accepts the risk is the reinsurer. The insured is not a party to the contract of reinsurance and the failure of the reinsurer to pay the insurer that is the ceding company does not prejudice the insured.
According to Golding, Reinsurance is a method whereby an original insurer distributes its risk by giving off the whole or some portion thereof to another insurer, with the aim of reducing the amount of its possible loss.
However, Reinsurance is a contract between the insurer often referred to as the reassured, and the reinsurer; whereby the reassured is insured not against direct loss but against the liability which he has undertaken under his own contract of insurance with the assured. so the objective is to protect the direct insurer or the ceding company from being crippled by big or huge damage beyond his financial capacity.
The main purpose of reinsurance:
Reinsurance has many purposes among them including the following
Spreading of Risk:
Spreading of risk is one of the reasons why reinsurance exists. Reinsurance as a device of insuring the insured risks of a direct insure ensures that the potential impact of large and hazardous perils are spread; so the direct insure enjoys wide spreading of risks with that, his liabilities would not be concentrated hearty in any class of insurance or any geographical area or any location.
Training the Direct insurers Underwriting Staff:
The professional reinsurance companies do have technical expertise insurance business which offers a lot of assistance like training and administrative facilities to their ceding company.
Protect the Direct Insurer Against Accumulation of Losses:
This is one of the main purposes of reinsurance; It entails stabilization of the direct insurers’ portfolio minimizing claims circulation. The assumption has experienced on when a claim will occur and what it will cost can hardly be precise.
Giving the Direct Insurer the Preveladge to Accept Risk the Retention Capacity:
Reinsurance has this point as one of its aims or purpose. This point enables the ceding company to bear the risk that is greater than his retention ability if he has a reinsurance arrangement;
For instance, say an insurer whose retention capacity in motor insurance is $2,000,000 would be in an unhealthy situation accepting a proposal of $3,000,000 sum assured, but with reinsurance arrangement accepts it with the above heading on point.
Boosting the Certificate of Ceding Company:
This is also another purpose of reinsurance companies. Since fact review that a huge number of uncertainties limit willingness to enterprises. Like a manufacturer who has some of his insurable risk protected by the insurer, other things being equal enjoyed boosted confidence to invest more money in this business.
Therefore, in the manner the insurance helps stabilize the insured loss, reinsurance helps the direct insurer to stabilize his ability by removing some of the uncertainty.
Reducing the Effect of Losses on the Direct Insurer:
Most time, cataclysmic events do occur resulting in huge damages capable of reducing the reserve of the direct insurer. A reinsurance arrangement will help the direct insurer cushion the effect of such possible financial strain due to the occurrence of events giving rise to losses or rapid growth of the portfolio of the direct insurer.
Types of Reinsurance:
There are basically two types of reinsurance and they are as follows
a. Facultative Reinsurance and
b. Treaty Reinsurance
These are the outdated or old methods of reinsurance that facilitate the consideration of risk separately. In other to place a risk facultatively, the insurer would have to submit the details of the risk on a reinsurance ship to the reinsurer who would consider the risk on its merit and either accept or reject the risk or state terms upon which it would accept. When the reinsurer accepts be usually indicates the proportion of the risk he wishes to be committed to.
Ordinarily, a treaty simply means a formally concluded and ratified agreement between the ceding company and the reinsurer where the ceding company agrees to cede and the reinsurer agrees to accept all reinsurances offered within the limits of the treaty.
These limits can be monetary, geographical, branch, and section. This means that automatic protection is secured; It is obligatory for the ceding company to cede risk in accordance with the terms of the treaty and it is also obligatory for the reinsurance to accept all risks within the scope of the treaty.
Also, treaties in insurance may be, quota share treaty, surplus share treaty, and excess of loss treaty.
A quota share treaty: A quota share treaty is known as a fixed share treaty. There is a binding reinsurance agreement whereby the ceding office must cede and the reinsurance must accept an agreed definite proportion of every risk written by the ceding company on an agreed class of insurance business.
Surplus Share Treaty: A surplus share treaty is an automatic reinsurance contract whereby the reinsurer must accept any contract risk over the retention of risk and it is usually arranged in lines. the agreed retention for placement of risk is known as a line.
Excess of Loss treaty: This is a form of reinsurance contract under which the reinsurer undertakes to reimburse the ceding office for all losses in excess of a relatively high limit fixed by the ceding company’s net limit and in consideration of which the insurer will receive a percentage of the ceding company’s net premium income for the class of business reinsured under the excess of loss treaty.
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