Reinsurance is where an Insurer transfer part of a risk to another Insurance company (Reinsurer).
The Reinsurer can also transfer part of their risk to other Reinsurers, this is called Retrocession.
Reasons for Reinsuring:
1] Stability – It stabilizes the insurers losses by smoothening the fluctuations of the losses from each year
2] Capacity – The direct Insurer might not have the underwriting capacity to accept certain risks
3] Catastrophe Protection – Catastrophes can lead to massive claims, Reinsurance can cushion the effects of such events
Methods of Reinsuring:
1] Facultative – Customizable, time-consuming and costly
2] Treaty – Not customizable, Reinsurers are bound to accept risks without prior knowledge, less cumbersome and less costly
Types of Reinsurance:
1] Proportional – The amount of risks & premiums retained are shared in the same proportion by the Insurer & Reinsurer
2] Non-proportional – Reinsurer automatically accepts liability for all losses in excess of an agreed amount
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