Reinsurance Definition, Types, Benefits and How it works

In our last two blogs, we have been covering protection of PolicyHolder' interest. We have covered all IRDA provisions for protection and why policyholders should feel safe.rnBut still one area worries every one that is what will happen to Insurance companies if more people die or fall sick. How will Insurance Companies honour the claims? So Policyholders should not be worried because Insurance companies insure their business under reinsurance. In this blog, we are covering this fear of policy holders by understanding the concept of reinsurance.rnPublic take insurance to cover the risk of an uncertain event and feel safe. In the same way, insurers buy insurance for their business and feel safe. Their business is to pay a claim if an insured event occurs. This system of Insurers buying insurance is called Reinsurance. This protects Life, Health and General Insurance by reducing their exposure to a specific risk. For example, Life Insurers calculate the premium on the standard mortality table expecting an average mortality claim however It is possible that claim exceeds budget then Insurance companies would have difficulty in paying claim. So Insurers follow a system that all risks beyond a standard risk are insured under reinsurance. For example, in life insurance all death cover over Rs 50 lakhs may be covered under reinsurance. In health insurance all cases over Rs 10 lakh may be covered under reinsurance. Same way, general insurance covers all large cases under reinsurance. So reinsurance shares the claim as per an agreed formula if such claim happens and insurance companies maintain their solvency.rnWhat is Reinsurance?rnReinsurance means an insurance for insurance companies. Insurance companies cover the risks for individuals and businesses. Reinsurance covers the risk of excessive claims due to different reasons for insurance companies.rnHow many types of Reinsurance?rnThere are two types of reinsurance:rnTreaty ReinsurancernFacultative ReinsurancernHence the concept of reinsurance must reassure Policy Holders that all claims will be paid even if an extraordinary event happens. For example, Pandemic Covid 19 is causing extra cases of death and patients but such extra burden will be shared by reinsurers. These reinsurers are large international organization’s who are collecting premiums from across the world.rnHow Reinsurance Works?rnFor awareness, few terminologies of Reinsurance are given below:rnCeding Party: Insurers who are buying reinsurance or a party who is sharing the loss.rnTreaty Reinsurance: Reinsurance for a specific period. Cover all risk (written or not written) for a given period.rnFacultative Reinsurance: Reinsurance for specific cases as per given agreement i.e all cases beyond Rs 50 lakhs.rnProportional Reinsurance: Here reinsurer agrees to insure risk by taking a proportion of premium collected.rnNon Proportional Reinsurance: Here reinsurer pays only if claim exceeds an agreed limit for example insurer will pay the claim till Rs 50 lakh and anything beyond Rs 50 lakh will be paid by reinsurer.rnAll Insurance companies operate under the system of reinsurance which is regulated by IRDA. IRDA ensures business solvency by keeping a regular check on total cover provided and cover under reinsurance. Insurance Samadhan has handled over 13000 cases in last 20 months and aims to build a grievance free eco system for the growth of Insurance Business.rnTo reach us at InsuranceSamadhan.com –rnCall us at – 844 844 0626rnMail us at – corporate@insurancesamadhan.comrnRegister your insurance complaint here