Reinsurance is a specific sector of insurance that helps insurers cover their risks more efficiently by yielding them to a reinsurer. Reinsurance treaties are contracts under which the reinsurer agrees to protect the original insurer against all or part of the primary insurance risk. While it doesn’t dismiss the insurer’s liability to its policyholders, it can reduce net liability and provide catastrophe protection in case of multiple losses. This can be extremely beneficial to the ceding company.
Functions of Reinsurance
Unlike regular insurance, reinsurance is far more complex, especially due to its broader range of activities and international nature. There are three main essential functions of reinsurance treaties that include:
• Greater security for the insurer’s equity and solvency. It also provides stability, especially when unexpected and major events occur. Reinsurance treaties help reduce risk by having the reinsurer cover the direct insurer above certain ceilings or against amassed individual commitments.
• Another important function is that it allows insurers to increase the amount of clients they can insure for a given loss or category of losses. With reinsurance treaties, they can more efficiently underwrite policies covering a larger number of risks, or larger risks in general. The best part is the PlayMillion har onlinesverigecasinon.com spel och formaner for var och en: forst och framst har vi alla de populara och traditionella casinospelen, liksom kortspel, bordsspel, skraplotter och live casinospel, dar samtliga kryddats med spektakulara jackpottar och generosa bonusar. insurers don’t have to excessively raise their administrative costs or anything to cover their solvency margin, which in turn works better for shareholders’ equity.
• In the event that there is an exceptional loss to the insurer, reinsurance treaties makes substantial liquid assets available to help combat the damages.
Types of Reinsurance
In most cases, reinsurance contracts are either automatic treaty or facultative. Under treaty reinsurance, the reinsurer must accept all risks that are defined in the agreement. With a facultative treaty, the reinsurance is negotiated and both the insurer and the reinsurer must decide what they are willing to cede and/or accept.
A third, but less common, treaty structure is called facultative-obligatory reinsurance. With this type of reinsurance, the surrendering of the risks to the reinsurer is on a facultative basis but the acceptance of the risks is mandatory for the reinsurer.
Reinsurers will typically purchase reinsurance to cover their own risk as well so they can increase their own capacity. This reinsurance of a reinsurer’s business is called a retrocession. The reasons for doing this are very similar to a primary insurer’s reason for purchasing reinsurance: to reduce net liability on individual risks, protect against catastrophic losses and obtain additional underwriting capacity.
This article was written by Roger Brent Hatcher, a Georgia insurance lawyer at Smith, Gilliam, Williams & Miles, a leading Atlanta Law Firm since 1928.
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