Reinsurance – an insurance company’s transfer of some or all of the risk that has already been once received from the policyholder based on the insurance contract.
Action to insurance
It is a type of secondary action to insurance, which means that no insurance funds are created as a result of reinsurance. The reinsurance undertaking receives a reinsurance premium in exchange for protection provided to the assignor.
Partial or total risk, taken over by the reinsurer, may be split up and re-submitted in part or in whole to the benefit of another entity. In this case, we deal with retrocession.
Reinsurance is a division of risk of a vertical nature. In turn, the division of the horizontal risk is called co-insurance. In this case, two or more insurance companies take the risk to insure in a certain part.
The reinsurance contract subjects are:
- ceded, reinsured, or insurance company that gives away the risk,
- assignee, reinsurer, i.e. an insurance undertaking accepting the risk.
The reinsurance subject is the general financial position of the reinsurance undertaking.
Depending on the role played by individual parties of the reinsurance contract, the following are distinguished:
- active reinsurance (taking risks),
- passive reassurance (risk elimination).
Division of reinsurance contracts
We can distinguish many different types of reinsurance contracts, depending on the adopted criterion. Types of contract due to:
- form of obligation – optional, obligatory, optional and obligatory contracts,
- risk sharing – proportional and disproportionate agreements.
The purpose and benefits of reinsurance
The main purpose of reinsurance is to share and exchange risk. This allows you to reduce the risk of losses that would be greater than the own funds of the insurance company. As a result, thanks to reinsurance, insurance companies are able to operate on a much larger scale.
In addition to risk diversification, reinsurance also brings other benefits. These are:
- increasing the insurance capacity,
- increasing the efficiency of using the capital base,
- reducing uncertainty, e.g. when introducing new products,
- protection against the effects of natural disasters,
- access to reinsurers’ knowledge and service,
- building a stronger competitive position on the market.