Meaning of Reinsurance:
Reinsurance refers to. the insuring again by the primary insurer. So it is an arrangement whereby an original insurer who has insured a risk insures a part of that risk again with another insurer, that is to say, reinsurance a part of the risk in order to diminish his own liability. The primary insurer which is principal insurance and which makes direct contract with insured, which is called ceding company. So it makes arrangement with another company insurer called reinsurer for the excess of the liability not bearable by the ceding company. The reinsurer doesn't have direct relationship with the insured.
According to the Nepal Insurance Company Act, 2049 sec. 2(h):
"Reinsurance business means the business of insuring .again the part of liability that is excess to bear by the insurer."
So in case of reinsurance arrangement an original insurer who has insured a risk insurance, the part of that risk again with another insurance. In another word, it insures a part of the risk in order to diminish his own liability. Reinsurance makes the ceding company able to spread the risk in a substantially efficient way by which the company can insure the insurance of any extent of liability.
Why reinsurance is important.
Reinsurance is the transfer of insurance business from one insurer to another. It is a tool that can substantially spread the risk to a large number of persons willing and exposed to the risk. So it is also a contract of indemnity. At the time of loss" the reinsurer indemnifies the loss upto the amount of reinsurance. So the importance of reinsurance can be discussed below:
1. Big amount of risk can be born:
With the arrangement of reinsurance, the original insurer or a ceding company can bear the risk of any extent of liability. That ultimately benefits the insured too. By accepting such amount, the insured can make insurance in a single insurer without purposing to various insurers, a part of the risk.
2. Greater stability, higher certainty:
The spread of risk ultimately has another benefit. It provides stability and certainly in insurance business.
3. Consistency in underwriting and premium:
The consistency in insurance business is necessary for the consistency in underwriting and premium. Since the risk is born by the original insurer, only two or certain extent of liability causes consistency in underwriting and premium.
4. Stabilize income / profit:
It stabilizes the income of the insurer because the spread of risk certainly provides more certainty to the risk bearing.
5. Accept insurance amount desired by the proposal:
The amount which is beyond the capacity of the insurer to be born is transferred to the reinsurer by bearing only the specific extent of liability by the original insurer. Therefore, any amount desired by the proposer can be born by the insurer.
6. It provides a safeguard against serious effects of conflagration.