While policyholders are concerned on paying the premiums of their insurance policies to secure damages and losses to unforeseen events, the insurance companies are also taking into account on how to maintain funds in paying these claims. This is why reinsurance is very popular.
Reinsurance is an insurance that is acquired by an insurer or an insurance company from another reinsurer or another insurance company through risk management which means the share of risks from the insurance company to another insurance company in exchange of a part of the paid premiums. The insurer and the reinsurer will sign the reinsurance agreement that entails all the detailed conditions that explains that the reinsurer will be the one to pay the any losses of the insurer. The reinsurance act started way back in the 1300s.
For instance, an insurer was able to sell a thousand of policies having a policy limit of $1 million each; the insurer would solely lose $1 billion of the total sum of all those policies. In the reinsurance agreement, the reinsurer may minimize the risk of the insurer.
Generally, reinsurance is most likely to be applied in bigger insurance policies; however companies may choose to be a part in the practice if they don’t specialise a specific insurance product. Take for instance if the policy is totally packaged to cover health insurance for worker’s compensation and employees insurance, the company itself would feel confident knowing that another company is handling one of the other divisions. This does not only provides security to minimize risk of an individual company but it also opens gates for a certain company with much expertise in a specific area to stand out and handle these kinds of matter.
Despite of this clear benefit, the ultimate reason why reinsurance is very dominant is because of risk mitigation. Like for instance, if the insurance company has a wide coverage of policies or a smaller high risk policies, these big and small policies may come up with a big deal of revenue but at the same time could cause liability in term of catastrophes if disasters are to take place. Because of this mere fact, insurance companies may seek and ask to share these risks to another company that could pay these damages and losses and in return pay these reinsurers with a part of the premium paid equivalent to the cost of the reinsurer.
Most of the insurance companies nowadays are enrolled to a reinsurance program but to some, they stick to specialize within the practice. They look out for other companies that had already sold insurance policies and provide to offer to take the risk depending on a certain premium rate. These companies might not be popular by name due to less exposure to the market and so therefore don’t really maintain a big bang presence in the public. Yet, claims are still being paid to the client by the carrier company where they signed contract with even if some other company is paying for the risks.