What is Reinsurance, please explain.
Apr. 04, 2017
In general insurance there are risks which, because of their magnitude or nature, one insurance company cannot afford to cover, e.g., aviation (airlines) insurance. Generally, in such cases, an insurance company insures the whole risk itself and lays off the amount it has accepted to other insurance of reinsurance companies, retaining only that much risks which it can absorb.
A reinsurance transaction may thus be defined as an agreement between a ceding company and a re-insurer whereby the former agrees to cede and the latter agrees to accept a certain specified share of risk or liability upon terms as set out in the agreement.
A ceding company is the original insurance company which has accepted the risk and has agreed to cede or pass on that risk to another insurance company or a reinsurance company. It may however be emphasized that the original insured does not acquire any right under a reinsurance contact. In the event of loss, therefore, the insureds claim for full amount is against the original insurer.
In other words, if an insurer is not willing to bear the whole of the risk, it reinsures itself. Some risk retains with some other insurer. This is called as reinsurance. Both re-insurer and original insurer share the premium and risk in the same proportion and decided by them earlier.
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