MEANING AND DEFINITION:

The term ‘Reinsurance, also termed as insurance of insurance’. It means an insurer who has assumed larger risk may arrange with another insurer to insure a portion of the insured risk. In other words in the event of loss, it would be beyond the capacity of the insurer, then this reinsurance process is resorted to. In reinsurance, therefore, one insurer insures the risk which has been undertaken by another insurer. The original insurer who transfers a part of the insurance contract is called the re insured and the second insurer is called the re insurer. Of course, the re insurer has to pay reinsurance premium for risk shifted. Reinsurance is a category of life insurance.

To be effective, the reinsurance policy must be formulated after carefully considering all aspects of the situation to which it is to be applied.

Important Concepts of Reinsurance

The following are definitions of terms generally used in Reinsurance:

(a) Direct Insurer: The Insurer who accepts the risk from the proposed and who, so far as the policyholder is concerned, is alone responsible for the obligation undertaken.

(b) Re-Insurer: The insurer who grants a guarantee (or accepts a reinsurance) from the direct insurer.

(c) Ceding Insurer: The insurer who obtains a guarantee (or places reinsurance).

(d) Cession: The amount given off by way of reinsurance and therefore the amount accepted by the reinsured.

(e) Reinsurance Policy: The contract of reinsurance, expects in fire practice where it is termed as guarantee, or guarantee policy.

(f) Retention or Holding: The proportion of the risk which the direct Insurer holds on his own account.

(g) Line: The amount of the retention of the direct insurer : a Re insurer may accept one or more lines (or a fraction of a line )

(h) Retro cession: A reinsurance of a reinsurance i.e. where the Re insurer desires to reduce the limit of his liability in respect of business accepted.

(i) Reinsurance Commission: The amount paid by the Re insurer to the Ceding Company as a contribution to the acquisition and administration costs. It is calculated on a percentage of the premium received by Re insurer.

(j) Profit Commission: A percentage of the earned profits which the Re insurer agrees to return because the profit earned on business passing under a reinsurance treaty is deemed to be due to skill and care in the conduct of the business by the direct insurer.

Characteristics of Reinsurance

The following are the important characteristics related to reinsurance, a growing category of life insurance.

(1) Reinsurance is like insurance which is practiced by which insurers can spread their loss.

(2) Reinsurance contract is applied by the same principles which governed the original contract of insurance.

(3) An original insurer has got insurable interest to the extent of the risk undertaken by him. Therefore, he can reinsure the property to that extent.

(4) Reinsurance can be terminated when the original insurance lapses for any reason.

(5) In the event of loss, the original insurer has to pay the assured sum first to the insured. Then he will recover from the re insurer his share of the liability.

(6) In the absence of any privacy of contract between the original party who has insured his subject matter and the re insurer, the re insurers are discharged.

(7) The re insurer is not liable to the original insurer in the event of loss.

This category of life insurance, Reinsurance spreads the risk and covers the loss.