REINSURANCE
Reinsurance is an arrangement whereby an original insurer who has insured a risk insures a part of that risk again with another insurer, that is to say, reinsures a part of the risk in order to diminish his own liability. The difference between the retention and the total amount of acceptance is reinsured. The limiting or retention and effecting of reinsurance brings about a wider distribution of the risks and secures to the insurer the full advantages of the law of average.
Limits
It is usual to fix a limit up to which the insurer is prepared to lose on risks in a specified class. The limit depends upon the following circumstances:
1. The financial status and premium income of the isurer. A new insurer with small premium income cannot afford to sustain a loss which might be borne with ease by established insurer with sample reserve.
2. The experienced in a particular class of risk:
i. The degree of the fire hazard present.
ii. The extent of the damage likely to be sustained.
iii. The fire extinguishing facilities available.
3. The limit will vary according to the nature and size of the concerns proposing for insurance.
4. Location and other factors affecting the risk are also taken into account while calculating the amount of limit.
Retention
After deciding the limit, retention can be easily fixed. Retention is the amount of maximum liability which the insurer can assume on a particular risk. The retention is determined according to the class to which it belongs and to its merits and demerits. The retention is also decided upon the total amount of insurance in force, the average size of its policies and the amount of surplus fund available with it. It also depends upon the size of company, age of issue, the type of policy and the class of risk.
Reinsurance
Reinsurance is the transfer of insurance business from one insurer to another. The insurer transferring the business is called the ‘principal’ or ceding or original office and the office to which the business is transferred is called for ‘reinsurer or ‘guaranteeing office’. It is also a contract of indemnity. The original company must disclose all the material facts to the reinsurer. At the time of loss the reinsurer indemnifies the loss up to the amount of reinsurance. The reinsurance amount is obtained by deducting retention amount from the original policy amount.
