Characteristics & Objectives of Reinsurance, Principles of Insurance Video Lecture | Principles of Insurance - B Com

Ans. Reinsurance has several characteristics, including: - It is a risk management tool used by insurance companies to transfer a portion of their risk to another insurer. - Reinsurance can be either facultative or treaty. Facultative reinsurance is done on a case-by-case basis, while treaty reinsurance covers a specific type of risk for a specified period. - Reinsurance can be proportional or non-proportional. Proportional reinsurance involves sharing both premiums and claims, while non-proportional reinsurance only covers claims that exceed a certain threshold. - Reinsurance allows insurance companies to stabilize their financial position by reducing the impact of large claims. - Reinsurance provides insurance companies with access to expertise and capacity that may not be available in-house.

Ans. The objectives of reinsurance include: - Spreading risk: Reinsurance allows insurance companies to spread their risk across multiple insurers, reducing their exposure to catastrophic events or large claims. - Stabilizing underwriting results: Reinsurance helps insurance companies stabilize their underwriting results by sharing the risk with other insurers. This can help prevent large fluctuations in profitability. - Increasing capacity: Reinsurance provides insurance companies with additional capacity to underwrite more policies without increasing their risk exposure. - Accessing expertise: Reinsurance allows insurance companies to access specialized expertise and knowledge from reinsurers, which can help improve their underwriting and claims handling processes. - Regulatory compliance: In some jurisdictions, insurance companies are required to have a certain level of reinsurance coverage to comply with regulatory requirements.

Ans. The principles of insurance include: - Utmost good faith: Both the insured and the insurer are expected to act in good faith and provide all relevant information when entering into an insurance contract. - Insurable interest: The insured must have a financial interest in the insured property or person. Without insurable interest, an insurance contract would be considered invalid. - Indemnity: Insurance is designed to compensate the insured for their actual financial loss, up to the limit specified in the policy. Insurance is not meant to be a source of profit for the insured. - Subrogation: If the insurer pays a claim to the insured, the insurer may take legal action against a third party responsible for the loss to recover the amount paid. - Contribution: If the same risk is insured with multiple insurers, each insurer will contribute proportionally to the claim payment based on the policy limits.

Ans. Reinsurance helps insurance companies manage risk in several ways: - Risk transfer: By purchasing reinsurance, insurance companies transfer a portion of their risk to the reinsurer, reducing their exposure to catastrophic events or large claims. - Financial stability: Reinsurance allows insurance companies to stabilize their financial position by sharing the risk with other insurers. This helps prevent large fluctuations in profitability. - Capacity enhancement: Reinsurance provides insurance companies with additional capacity to underwrite more policies without increasing their risk exposure. - Expertise access: Reinsurers often have specialized knowledge and expertise in specific areas, which can help insurance companies improve their underwriting and claims handling processes. - Regulatory compliance: In some jurisdictions, insurance companies are required to have a certain level of reinsurance coverage to comply with regulatory requirements. Reinsurance helps insurance companies meet these obligations.

Ans. The main difference between facultative reinsurance and treaty reinsurance is as follows: - Facultative reinsurance: Facultative reinsurance is done on a case-by-case basis. Insurance companies cede individual risks to reinsurers, and each risk is evaluated and priced separately. This type of reinsurance is typically used for large or unique risks that are not covered under treaty reinsurance. - Treaty reinsurance: Treaty reinsurance covers a specific type of risk for a specified period. Insurance companies cede a portion of their entire portfolio of risks to reinsurers under a treaty agreement. This type of reinsurance is more standardized and involves the automatic sharing of premiums and claims based on predetermined terms and conditions. Treaty reinsurance is often used for common risks that can be grouped together, such as property, liability, or life insurance policies.