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What Is Reinsurance And What Are The Benefits?

In House Magazine
19 Jul 2019
What Is Reinsurance And What Are The Benefits?

Have you ever heard of the term Reinsurance? Reinsurance is a term used by a company/business entity to protect it against an insurance risk by utilizing the services of an insurance company.

If the insurance company believes that the insurance value of a premium is greater than the value it can bear, then the company can share the risk it faces by reinsuring part of the value with another company (reinsurance company).

Implementation of reinsurance in an insurance company can protect the stability of the company's total income, because very large losses have been protected by reinsurance.

Another reason is to gain an advantage/profit as an intermediary by reinsuring the insurance company again with a lower premium amount than the amount of the premium charged by the insurance company itself to its customers.

Then, what are the benefits of Reinsurance?

1. Increase the amount insured

The benefit of reinsurance is to increase the quota of the insurance company, making it possible to cover it with high amounts of coverage.

The small amount of quota owned by a certain Direct insurer makes it difficult for the Direct insurer to cover sums insured that exceed the available quota.

2. Create a sense of confidence

Reinsurance provides the same benefits for insurance companies. Example: an uncertainty can be eliminated by using certain insurance mechanisms, an entrepreneur will be ready to increase the amount of his investment compared to keeping his money as a reserve.

This applies equally to Direct insurers as one of the effects of uncertainty that can be eliminated with the help of reinsurance.

3. Make losses certain

The occurrence of a loss can be considered certain, but what cannot be certain is the frequency with which a loss will occur, how much it will occur and when it will occur.

4. As a safety

The insurance company's financial situation will have a negative impact in terms of bearing large losses. Reinsurance's role is to protect insurance companies from these circumstances.

5. Risk spreading tools

As mentioned above, reinsurance is a mechanism for transferring a risk from the insurance company to the reinsurer. Therefore, reinsurance acts as a tool for spreading risk.

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