In our last two blogs, we have been covering protection of Policy Holder’ interest. We have covered all IRDA provisions for protection and why policy holders should feel safe.
But still one area worries every one that is what will happen to Insurance companies if more people die or fall sick. How will Insurance Company honour the claims? So Policy holders 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 concept of reinsurance.
Public take insurance to cover the risk of an uncertain event and feel safe. In the same way, insurers buy insurance of their business and feel safe. Their business is to pay claim if 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 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 risks 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 cover all large cases under reinsurance. So reinsurance shares the claim as per an agreed formula if such claim happens and insurance company maintain their solvency.
What is Reinsurance?
Reinsurance 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.
How many types of Reinsurance?
There are two types of reinsurance:
- Treaty Reinsurance
- Facultative Reinsurance
Hence concept of reinsurance must reassure Policy Holders that all claims will be paid even if an extra ordinary 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.
How Reinsurance Works?
For awareness, few terminologies of Reinsurance are given below:
- Ceding Party: Insurer who are buying reinsurance or party who is sharing the loss.
- Treaty Reinsurance: Reinsurance for a specific period. Cover all risk (written or not written) for a given period.
- Facultative Reinsurance: Reinsurance for specific cases as per given agreement i.e all cases beyond Rs 50 lakhs.
- Proportional Reinsurance: Here reinsurer agrees to insure risk by taking a proportion of premium collected.
- Non Proportional Reinsurance: Here reinsurer pays only if claim exceeds an agreed limit for example insurer will pay the claim till Rs 50 lakh and any thin beyond Rs 50 lakh will be paid by reinsurer.
All 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.
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