All insurance organizations are financially sound to pay for the claims however, they are not infinitely sound. The claim amount can run into billions in case of a catastrophic event like a high magnitude earth quake or a tsunami causing significant amount of life loss. In such a case, there is a chance that your life insurance risk cover is not paid for due to the insurer exhausting its existing reserves. What happens to the security of your family in your absence?
In order to avoid such situations, insurance organization go for something known as “Reinsurance”. Reinsurance is a process by which your primary insurance provider will ensure the aggregate risk with another insurance company. This ensures that in the event of significantly high claims due to a natural calamity, the risk is borne by two companies instead of one. This is a win-win situation as both the insurance company as well as policy holders are well protected. There are some companies in India that are primarily in the business of reinsurance simply due to the importance and criticality of reinsurance.
Broadly, there are two types of Reinsurance:
- Facultative Reinsurance: This is a type of reinsurance ULIP where all individual life insurance risk covers are taken into consideration and a decision is taken on the policies needing reinsurance as well as the percentage of risk that will be transferred
- Reinsurance by Treaty: As stated above, there are companies in India that are primarily in the business of reinsurance. In reinsurance by treaty, the reinsurance firms come up with proposals that offer the primary insurers to choose the maximum amount of risk they are ready to accept. The primary insurer can choose between proposals depending on their risk exposure and form an agreement with the reinsurance company.
Reinsurance by Treaty is also two types:
- Surplus: In this type of reinsurance, three aspects are taken into consideration when forming an agreement: 1) % of risk that is to be transferred to the reinsurer, 2) the acceptable amount of cover that the reinsurance company is ready to accept and 3) the estimate of loss that the primary insurer will make in case of an unforeseen situation or emergency
- Quota: In this case, some percentage of the risk is borne by the primary insurer and the rest is borne by the reinsurance company. This percentage is fixed at the time of signing the agreement
Almost all insurance providers take the route of reinsurance in order to protect themselves as well as their customers. Hence, it is highly recommended that as a policy holder, you understand the concept of reinsurance in order to make an informed decision about your insurance company.
“Finserv Markets, from the house of Bajaj Finserv is an exclusive online supermarket for all your personal and financial needs. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!”