After reading this article you will learn about the meaning and types of reinsurance.
Meaning of Reinsurance:
Reinsurance means where a risk is considerable any insurance company would like to insure the risk up to a certain amount themselves. And put the excess risk out to a re-insurance company, or to a more than one, on the principle of diversifying the risk.
In case of insurance companies, if any claim is raised by the insured, the insurance company is liable to make good the losses incurred by the insured, if the claim satisfy all the terms and condition of the policy purchased by him. In such cases the insurance company has to bear the financial burden.
In order to share such burden the insurance companies get themselves also insured against such financial burdens. The insurance companies therefore to protect themselves enter into a contract with another company engaged in the business of reinsurance popularly known as third party.
The contract made between an insurance company and Reinsurance company to protect the insurance company from losses is known as reinsurance. The contract provides for the reinsurance company to pay for the losses sustained by the insurance company when the company makes a payment on the original contract.
The protection of reinsurance is available only after the insurance company makes the payments of any claim. In other words first the insurance companies are require to settle the claim and thereafter seek the reimbursement thereof from the re-insurance company.
This exercise is like seeking indemnity of losses according to which it becomes effective only when the insurance company has already settled a claim and made payments to the original policy holder.
This means that insurance companies also pass on their losses to another company by way of re-insurance contract. Reinsurance therefore provides a way for any insurance company to make good of its losses from the reinsurance company for the amount paid to the original policy holder.
Very simple the insurance company is free to pass on its losses to another company engaged in the business of re-insurance. It appears that the reinsurance companies remain always on receiving hand. In fact the reinsurance companies also diversify their risk by ensuring that the reinsured must reduce their reserve requirements and as such must increase their assets.
Who is Re-Insured:
Any insurance comprises only two parties the insurer company and the insured one. In case of re-insurance a third party is introduced or comes into picture. This third party is known as re-insurer. The Insurance company which has issued the original insurance policy to any policy holders in turn gets it re-insured with the re-insurance company to cover it risks.
The original policy holder of any kind of insurance get re-insured by its original insurance company without his/her knowledge. Accordingly he or she does not enjoy any rights against the reinsurance company.
The original policy issued by any insurance company is the basic issue for consideration of any re-insurance company. Reinsurance requires that the policy must be for an interest that specifies the involved interests. Such interest are pre-requisites for availing a reinsurance policy.
After a re-insurance policy is issued once such interests cannot be altered. The sum and amount of reinsurance cannot exceed the original amount specified in the reinsurance policy also the reinsurance policy cannot cover a period longer than the original policy.
Types of Re-Insurances:
1. Facultative Re-Insurance:
These type of re-insurance policy are commonly known as optional policies. It is up to reinsurance companies to issue or not any re-insurance policy. These type of policies are issued on an individual analysis of the situation and facts of the policy under consideration.
The policy may or may not cover all or part of the said policy. Such type of policies depend on the risk associated with them. These policies are used by the reinsured to reduce the chance of risks/losses associated with particular policy.
2. Treaty Re-Insurance:
It is particular type of policy which is issued by the re-insured. When we talk about a treaty policy it envisages the meaning of an agreement or negotiations like a treaty. In such type of reinsurance mostly is a written agreement to cover a particular class of policies issued by the reinsured.
A particular class means policies covering similar type of reinsurance such as all property insurance policies or accident or other type of casualty insurance policies. The important feature of treaty insurance is that it passes the risk to the insurer for all policies which are covered under the treaty agreement and not just one particular policy.
3. Double Insurance:
By the meaning of double one can easily understand that it twice enhanced benefit. But with reference to insurance it is a situation of getting two overlapping policies for the same and the one risk from two different insurance companies. In case of eventuality the insured can claim from both the insurance companies. Claiming from two companies does not mean that an insured can earn profits. Any insured cannot claim more than the actual losses or damage occurred.
All the insurance companies are law bound to share only the actual loss in the same proportion they share the total premium. For example any insurance policy purchased for a loss of Rs. 100.00 from company (A) and again for one hundred from company (B) and the total loss is Rs. 150.00.
The insured person cannot claim Rs. 100.00 from both companies to aggregate of insurance recovery of Rs. 200.00 and getting a profit of Rs. 50.00. Both the companies shall share the risk in proportion of the premium paid to respective company.
4. Duplicate Insurance:
It is always confused the double insurance with duplicate insurance. Duplicate protection is provided when two companies deal with the same individual and undertake to indemnify that person against the same losses.
When an individual has double insurance, he or she has coverage by two different insurance companies upon the identical interest in the identical subject matter. If a Husband and Wife have duplicate medical insurance coverage protecting one another, they would thereby have double insurance.
An individual can rarely collect on double insurance, however, since this would ordinarily constitute a form of Unjust Enrichment and a majority of insurance contracts contain provisions that prohibit this.
Double Insurance and re-insurance differ in nature. A double insurance is a contract where the insured makes two insurances on the same risk, and the same interest. It is made by the insured, with a view to receive a double satisfaction in case of loss, whereas a re-insurance is made by a former insurer, to protect himself from the risk to which they were liable by the first insurance. In both cases any insured cannot claim or receive the benefit of actual loss for the extend of amount insured.
5. Co-Insurance:
Not much prevalent in India the co-insurance as is clear by the meaning of words it is shared by co-pays of an insurance together that is insured and insurer. In other words this is type of insurance where the risk is shared between the insurer and the insured with each other. It helps to reduce the cost of premium for the insured but also benefits other people who are insured with the same group.
The terms and conditions of co-insurance are somewhat confusing for the reason that one or the other condition either overlaps or contradicts with each other. It becomes therefore of utmost importance that fully understand the terms before opting for a co-insurance. In short term we can say a co-insurance is an insurance generally sharing risk between the insurer and the insured. In other words it stands for co-pay also.
In general terms there remains a co-sharing agreement between the insurer and the insured specifically providing that the insured will himself cover a set of percentage of the costs covered under the agreement after deductibles and shall make such payments from his own sources and reaming shall be paid by the insurer. The concept of co-insurance can be said that it is a percentage participation where certain percentage of losses are paid by the insured and the remaining by the insurer.
In any co-insurance two terms are used frequently Co-Pay and Deductibles the difference between these two terms should be clear for every co-insurance policy holder. The Co-pay is specific amount that an insured is required to pay at the time of the visit of each doctor. Remember it is not a percentage of the doctor’s fees. Depending on the terms and conditions of the policy one has pay both for co-insurance and a co-pay for doctors visits.