Overview Reinsurance is insurance for insurance companies. It’s a way of transferring some of the financial risk insurance companies a-sume in insuring cars, homes and businesses to another insurance company, the reinsurer.
Reinsurance is insurance for insurance companies. It’s a way of transferring some of the financial risk insurance companies a-sume in insuring cars, homes and businesses to another insurance company, the reinsurer.
When an insurance company issues an insurance policy, an auto insurance policy, for example, it a-sumes responsibility for paying for the cost of any accidents that occur, within the parameters set out in the policy. By law, an insurer must have sufficient capital to ensure it will be able to pay all potential future claims related to the policies it issues. This requirement protects consumers but limits the amount of business an insurer can take on. However, if the insurer can reduce its responsibility, or liability, for these claims by transferring a part of the liability to another insurer, it can lower the amount of capital it must maintain to satisfy regulators that it is in good financial health and will be able to pay the claims of its policyholders. Capital freed up in this way can support more or larger insurance policies. The company that issues the policy initially is known as the primary insurer. The company that a-sumes liability from the primary insurer is known as the reinsurer. Primary companies are said to “cede” business to a reinsurer.
The reinsurance business is evolving. Traditionally, reinsurance transactions were between two insurance entities: the primary insurer that sold the original insurance policies and the reinsurer. Most still are. Primary insurers and reinsurers can share both the premiums and losses, or reinsurers may a-sume the primary company’s losses above a certain dollar limit in return for a fee. However, risks of various kinds, particularly of natural disasters, are now being sold by insurers and reinsurers to institutional investors in the form of catastrophe bonds and other alternative risk-spreading mechanisms. Increasingly, new products reflect a gradual blending of reinsurance and investment banking.
Reinsurance can be divided into two basic categories: treaty and facultative. Treaties are agreements that cover broad groups of policies such as all of a primary insurer’s auto business. Facultative covers specific individual, generally high-value or hazardous risks, such as a hospital, that would not be accepted under a treaty.
In most treaty agreements, once the terms of the contract, including the categories of risks covered, have been established, all policies that fall within those terms – in many cases both new and existing business—are covered, usually automatically, until the agreement is cancelled.
:max_bytes(150000):strip_icc()/GettyImages-1125625723-37ef6b9d36e64067a6609f35bac1d1b5.jpg)
:max_bytes(150000):strip_icc()/shutterstock_313802690-5bfc2b5446e0fb0051bdd5d0.jpg)
.jpg)
Buying house by selling equity shares? Here’s how you can claim tax exemption for LTCG on stocks sold The income tax laws allow taxpayers to claim tax exemption on the long-term capital gains arising from the sale of equity shares and other capital assets
