The advantage of
reinsurance can be summarized as given
below; (1). SPREADS THE RISKS: Reinsurance
makes the best possible
distributions of risk among the various insurers. Concentrations of larger risks on a particular insurer makes
it is a very hard to unction smoothly
efficiently and profitably Reinsurance
contributes a lot in the this respect by making best distributions of
risk among many insurers.: (2). LIMITS
THE LIABILITY : Reinsurance helps is in limiting the liability of the insurers to the maximum amount.
(3). PROTECTS THE INSURANCE FUNDS: It
protects the insurance funds to of the original insurer and gives additional
security to the policy holder and a
insuring community. (4). INCREASES
INSURER’S GOODWILL: The financial
and risk bearing capacity of the insurer
increases with the help of the
reinsurance and with the existence of
reinsurance facilities an insurer a\can
accept risk beyond his capacities. This enhances the goodwill
of the insurer. (5). CURBS
COMPETITION AND RIVALRIES: reinsurance reduce inter company business
competitions as no one works
independent but in co-operative manner
and the with helping mind in the area of
the insurance business, thus reinsurance helps in curbing competitions rivalries in the similar line of the insurance business. (6). BRINGS STABILITY: Reinsurance facilities in bringing stability in the insurance market. These
facilities also bring stability in the value of the shares os such companies
on the stock exchange. (7).
REDUCE PROFIT FLUCTUATIONS: The
reinsurance schemes reduce to a considerations
extent the violent fluctuations
in the profits of the companies . If no
the other hand, heavy risks are
retained by the original insurer, in the his profits are greatly upset due to a heavy single loss.
(8). INCREASES INSURANCE
BUSINESS: Reinsurance enables every
insurer to accept or underwrite insurance
business as the total risk will be distributed among the other reinsurers. Thus, reinsurance helps increasing the volume of insurance business,
In its absence, every insurer will
hesitate to accept huge risks and it would
be very difficult for an insurer,
in case the he accept risk exceeding hi
capacity. (9). MINIMUM DEALINGS: Due to the reinsurance schemes the insured is required to indulge to
in the minimum dealings with only
one insurer . Without reinsurance facility
, the insurer would have to contact several insurers to enter into
various individual insurance agreement
on the same property. This involves considerable cost, loss of the
precious time and slow down the pace of
the protection cover. (10). PREVENTS
RATE CUTTING: Finally the reinsurance prevent the rate cutting and acceptance
of undesirable risks to a great extent. This is obviously because the actions
of the ceding office are always subject
to audit and scrutiny and through
examinations by the guaranteeing
offer office for its satisfaction. This
leads to checks various unhealthy and undesirable practice
and promoters a healthy spirit of
competition among the insurers.
METHODS
OF REINSURANCE: There are two important
of effecting reinsurance cover: 1. Facultative
Reinsurance:. 2. Treaty Reinsurance.
1. FACULTATIVE REINSURANCE: It is also known as specific reinsurance, . Under this method
each risk is offered for reinsurance by the ceding company and may be accepted or declined at
will be may the insurer. The procedure is to submit brief details if the risk to
reach each reinsurer who will indicate
the proportion that he would accept. When the ceding company issues the policy, closing
particulars I.e. a copy of the policy
etc., is sent to the reinsurer who will
then issue the reinsurance policy. The reinsurance are not obliged to accept
the risk. That is they have the decide. options of facility to reject or
accept the reinsurance any amount they decide,. Hence the term
facultative reinsurance., In case of the risk is not fully accepted the ceding company may again have to the approach
another insurer for the balance. For example
a proposal for Rs. 60 crores come
with the ceding company. The retention
of the ceding company is 25 crores and for the balance of Rs. 35
crores he approaches insurer A who accepts for only Rs. 20 crores. The
ceding company may again have to approach insurer B for the balance of
the Rs. 15 cores., Any alterations in
the terms and conditions The reinsurance are not obliged to accept the risk.
That is they have the decide. options of facility to reject or accept the reinsurance any amount they decide,. Hence the term
facultative reinsurance., In case of the risk is not fully accepted the ceding company may again have to the approach
another insurer for the balance. For example
a proposal for Rs. 60 crores come
with the ceding company. The retention
of the ceding company is 25 crores and for the balance of he approaches insurer A who accepts for only Rs. 20 crores. The
ceding company may again have to approach insurer B for the balance of
the Rs. 15 cores., Any alterations in
the terms and conditions made by the ceding company are to be informed to reinsurance or
reinsurers also. This method is considered
to be the easiest method of
reinsurance at each time the ceding company has to make the a fresh proposal to the reinsurer and the insurer accepts the
risks after fully examining the individual
risk, . In the event of the loss, the ceding company is compensated in proportion
to the amount of the risk underwritten by each reinsurers.
2. TREATY REINSURANCE: Under this
method a treaty agreement between the ceding company and various reinsurance is
made for a fixed period, usually a year.
Accordingly the ceding company agrees to provide a certain amount of
business to the reinsurers for
reinsurance and the reinsurers agree to the accept all reinsurance business of the a definite type within the limits laid
down in the agreement . Whenever the
ceding company accepts the risk of the
original insured. , he has to retain a pre-determined proportions of the total risk so accepted and so has to
reinsure the remaining risk with other
reinsurers., He has to pay the premiums
to other re insurers for accepting the risk. This method, in fact provides
an automatics protections to the
ceding the company as the under the treaty the reinsurer has to
the accept . This method in fact
provides an automatic protection to the
ceding company as under this policy the treaty the reinsurer has to the accept
the risk coming with in the scope of
treaty .
That it is the why this methods is called it is a “Treaty
reinsurance or Automatic Reinsurance Methods” TREATY reinsurance is practically applied in
four ways, namely (a). Quota share treaty : (b). Surplus treaty: ( C ) ,. Excess of loss treaty : and the ( D ). Stop loss of
excess of the loss ratio treaty.