Reinsurance in simple terms is an insurance policy purchased by insurance companies. This is in place to protect the interests of the insurance companies and ensures that they remain solvent even during events when there is a scope for many major claims, like in the event of a natural disaster. The main purpose of this policy is to reduce the amount of loss an insurance company might incur and also give them enough time to recover from the losses.
An insurance company transfers the risk involved to another company when opting for reinsurance contracts. Insurance companies that opt to transfer the risk are called direct writers or ceding companies. The company offering the reinsurance policy is called an accepting company. Many of the insurance companies do not enter the reinsurance business as the capital required is much more than what is needed for an insurance company. Lloyds of London and LIC are some of the major players in the reinsurance business in India.
Types of Reinsurance
Reinsurance can be broadly divided into two types namely:
Reinsurance By Treaty
Insurance companies entering into a reinsurance contract with another company providing insurance is also called as treaty insurance. An agreement is in place with the insurance company and the direct writer. Reinsurance companies offer different proposals to the ceding companies mentioning the maximum risk they will be willing take from the insurance company. Direct writers will have the freedom to choose the best offer of their liking and enter into an agreement.
In facultative reinsurance, individual policies are considered and a decision is taken on what policy needs to be provided with reinsurance and the percentage of risk that will be transferred along with it. The important point here is that the coverage need not be offered just by a single company. Multiple companies can cover different individual policies. The amount of risk that is to be transferred is decided not by the reinsurer but by the ceding company.
One of the disadvantage of the facultative reinsurance is that it works with the underwriting policies of the ceding company. This might at times work against the accepting company if there is a mistake in the classification of risk by the ceding company. This will result in the reinsurance company suffering due to the mistake of the ceding company. In order to protect their interests, accepting companies have now started to get involved in the underwriting process of the insurance companies to ensure that they do not face any major losses due to the ceding company’s underwriting.
There are generally two types of premium that can be paid for a reinsurance. These two variants of the premium payment have been listed below:
- Direct premium or original premium: this will depend on the percentage of risk that is transferred by the ceding company to the reinsurance company. For example, if an insurance company wishes to transfer 40% of its risk to a reinsurance company, the accepting company will in that case recieve 40% of the premiums received by the ceding company.
- Revised risk premiums: This type of premium does not depend on the amount of premium received by the ceding company. The reinsurance company in this case will quote a premium on their own depending on the extent of risk covered by the company.
List of Major Reinsurance Companies Operating in India
Some of the important insurance companies operating in the country have been listed below:
- Lloyd’s India
- XL Insurance Company SE India
- Hannover Ruck SE - India Branch
- General Insurance Corporation of India
- AXA France Vie - India Reinsurance Branch
- Swiss Reinsurance Company Limited, India Branch
- Munich RE - India Branch
- SCOR SE - India Branch
While insurance has become one of the most important things to have these days, insurance companies also need someone to protect them in the case of any untoward incident and the reinsurance companies offer just that.