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Types of Reinsurance You Should Know

In House Magazine
17 Sep 2019
Types of Reinsurance You Should Know

The term "reinsurance" is not commonly heard by the general public. This term is used when an insurance company protects itself against insurance risks by utilizing the services of another insurance company.

The term "re" itself actually refers to the meaning of "to be able to share the risk it faces by reinsuring a portion of that value with another company (reinsurance company)."

So why do insurance companies feel the need to engage in reinsurance?

The first reason is to share or spread the risk. They may feel that the value of the insurance premium they are taking on is greater than the value they can bear.

All of this is done because companies fundamentally want to protect the stability of their income, and reinsurance protects them from potential significant losses.

In other words, to gain profit as an intermediary, insurance companies reinsure with reinsurance companies at a lower premium rate than what they charge their own clients.

Almost all reinsurance involves more than one reinsurance company, which is related to risk distribution. The reinsurance company that determines the contract conditions and reinsurance premiums is called the lead insurer, while other reinsurance companies participating in the contract are called following reinsurers.

Reinsurance is divided into two main types: proportional reinsurance and non-proportional reinsurance.

Proportional reinsurance is when the reinsurer takes over the claims risk proportionally based on the claims. For example, if there is a proportional reinsurance agreement between an insurance company and a reinsurance company for 30%, if a claim is made by a policyholder, the insurance company only needs to pay 70% of the claim amount, while the remaining 30% of the claim will be covered by the reinsurance company.

On the other hand, non-proportional reinsurance is when the reinsurance company covers claims above a maximum limit that it can bear. For example, if an insurance company and a reinsurance company have an agreement to cover claims above a limit of two billion, and there is a claim of 1.2 billion, the insurance company will cover the entire claim. However, if there is a claim of 2.5 billion, the insurance company will only cover according to the agreement, for example, 500 thousand, and the remainder will be covered by the reinsurance company.

So there you have it. Reinsurance products ensure that you don't have to worry about the guarantee of protection you receive after obtaining insurance, even for the most significant risks.

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