B Com Exam > B Com Notes > Principles of Insurance > Important Concept - Reinsurance - Concept of Insurance, Principles of Insurance, B com
Important Concept - Reinsurance - Concept of Insurance, Principles of Insurance, B com | Principles of Insurance PDF Download
What is a Ceding Company
The company ceding the risk, i.e., getting the risk reinsured, and has already been discussed.
What is Cession?
Means the amount of risk ceded for reinsurance, i.e., the amount reinsured.
What is Retrocession?
Means reinsurance of reinsurance. A reinsurer may like to get his interest protected by further reinsurance and so on.
What is Retention?
This refers to the amount of risk retained by the ceding company. The balance is usually reinsured. The amount of retention is dependent on the financial strength of the ceding company for that class of business. It is the refined figure of another term known as LIMIT.
Normally “Limit1’ is a rough guide of the ceding company and depending on the quality and nature of the risk the ceding co. may decide to enhance or reduce the limit for the purpose of actual retention.
What is Line?
A line is equivalent to retention, i.e., the amount retained by the ceding co… A reinsurance arrangement is usually expressed in terms of “line” meaning that if a ceding company has a ten- line or twelve-line reinsurance arrangement (TREATY) it can automatically cede or reinsure up to ten times or twelve times of the amount retained.
Who is a Primary Insured / Assured?
This refers to the primary insured (assured) originally insuring the risk at the first instance. He is one of the parties to the insurance contractand not in the reinsurance contract.
What is Reciprocity?
This is a widely used term in the transaction of the business of reinsurance, indicating a situation involving the desire for the satisfaction of mutual interest.
Normally, the direct insurers, at one time or the other, do transact reinsurance business also in addition to the insurance business.
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FAQs on Important Concept - Reinsurance - Concept of Insurance, Principles of Insurance, B com - Principles of Insurance
| 1. What is reinsurance and how does it relate to insurance? |  |
Ans. Reinsurance is a process in which an insurance company transfers a portion of its risk to another insurance company. It serves as a mechanism for insurance companies to manage their risks by spreading them across multiple insurers. Reinsurance helps protect insurance companies against large losses and provides them with financial stability.
| 2. What are the principles of insurance that apply to reinsurance? | |
Ans. The principles of insurance that apply to reinsurance are:
- Utmost good faith: Both the insurer and reinsurer must disclose all relevant information honestly and accurately.
- Insurable interest: The insurer must have a valid reason to insure the risk, and the reinsurer must have an insurable interest in the portion of the risk being transferred.
- Indemnity: The reinsurer agrees to compensate the insurer for the actual loss incurred, up to the predetermined limit.
- Subrogation: The reinsurer has the right to step into the shoes of the insurer and pursue recovery from the party responsible for the loss.
- Contribution: If there are multiple reinsurers involved, they share the risk and contribute to the payment of claims proportionately.
| 3. How does reinsurance benefit insurance companies? | |
Ans. Reinsurance provides several benefits to insurance companies, including:
- Risk transfer: Insurance companies can transfer a portion of their risk to reinsurers, reducing their exposure to large losses.
- Financial stability: Reinsurance helps insurance companies maintain financial stability by providing them with additional capital and protection against unforeseen events.
- Capacity enhancement: Reinsurance allows insurance companies to underwrite larger risks and offer higher coverage limits to their policyholders.
- Expertise and knowledge sharing: Reinsurers often have extensive experience and expertise in managing risks, which they can share with insurance companies, helping them improve their underwriting practices and risk management strategies.
| 4. What are the different types of reinsurance arrangements? | |
Ans. There are several types of reinsurance arrangements, including:
- Facultative reinsurance: This is a case-by-case arrangement where the reinsurer evaluates and accepts or rejects each risk individually.
- Treaty reinsurance: This is an ongoing agreement between the insurer and reinsurer, where the reinsurer automatically assumes a predetermined portion of the insurer's risks.
- Proportional reinsurance: In this arrangement, the reinsurer shares a proportional amount of the premiums and losses with the insurer.
- Non-proportional reinsurance: In this arrangement, the reinsurer only pays for losses that exceed a certain threshold or aggregate limit. The insurer retains the remaining losses.
- Excess of loss reinsurance: This type of reinsurance covers losses that exceed a specified amount. The reinsurer pays for the excess loss, while the insurer retains the primary portion of the risk.
| 5. How do insurance companies choose reinsurers? | |
Ans. Insurance companies consider several factors when choosing reinsurers, including:
- Financial strength: Insurance companies assess the financial stability and creditworthiness of potential reinsurers to ensure they can honor their obligations in case of large claims.
- Reinsurer's expertise: Insurance companies look for reinsurers with experience and expertise in the specific line of business they want to reinsure.
- Reinsurer's reputation: Insurance companies consider the reputation and track record of potential reinsurers in terms of claims handling, customer service, and timely payments.
- Pricing and terms: Insurance companies compare the reinsurance pricing and contract terms offered by different reinsurers to determine the most favorable arrangement for their needs.
- Regulatory compliance: Insurance companies ensure that potential reinsurers comply with all applicable regulatory requirements and have the necessary licenses to operate in the relevant jurisdiction.
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