Both insurance and reinsurance policies help recover the financial hindrance caused by damage or loss of the insured item. In both schemes, the guarantor is responsible for covering unforeseen expenses.
What is Reinsurance in India?
Many people are not familiar with what reinsurance is. Basically, the term 'Reinsurance', also known as "insurance for insurance companies," is an agreement between two insurance companies.
In this agreement, an insurance organisation transfers their risk to another insurance company, thereby mitigating the risks and retaining the amount of capital they need to support said risks. The volume of liability is defined according to the terms and conditions of the agreement.
To learn more about reinsurance, keep reading.
What Does Reinsurance Mean?
Reinsurance is a financial contract between two insurance organisations wherein an entity or the reinsurer takes either a part or the entire risk covered under insurance policies issued by an insurance company. For undertaking such risk, the reinsurance company is paid premiums by the insurance company in the similar ways that applies to individuals. It is basically an insurance coverage for insurance providers.
In a reinsurance contract, the liability of the reinsurer will arise only in situations under its reinsurance contract or insurance plan. The amount of that obligation will be decided as per the terms and conditions of the applicable reinsurance policy.
On the other hand, making a reinsurance agreement enables an insurance company to increase its volume of business, being capable to undertake increased risk than its capacity.
Additionally, reinsurers can also purchase reinsurance coverage, known as "retrocession." This is mainly done for the reduction of further risks.
How Reinsurance Works?
A reinsurance firm enables insurers to form a cumulative bunch of policies in order to disperse the prevailing risks. By distribution of risk, a single insurance organisation can take those customers into consideration whose coverage limit is burdensome for them to manage alone.
With the formation of a reinsurance agreement, the premiums paid by insured individuals are usually divided among insurance companies. For instance, an insurer sells an insurance plan to 5000 individuals, and the amount of coverage for each policy is equivalent to ₹ 1 Crore.
Now, if the company needs to pay an insurance claim of ₹ 2 Crores, they will be in trouble when paying the extra amount of ₹ 1 Crore. However, having a proper reinsurance agreement can safeguard it financially and provide coverage for the additional amount.
What Are the Types of Reinsurance?
1. Reinsurance TreatyIn a reinsurance treaty, the reinsurer comes to an agreement to offer coverage for all policies and those which the insurance provider does not yet mention for a particular tenure. However, this policy can become risky for a reinsurer if they do not minutely study every policy offered by the insurance company.
2. Facultative Coverage
An insurance company can buy facultative reinsurance based on the risks in the business. Subsequently, they can divide the premiums with other companies that offer protective tools. Here, a reinsurer may allocate the coverage among several insurance companies.
Since the plans are not arranged in this policy, it gives better scope to the reinsurer to assess their risks and decide whether they want to cover a portion of the policy or the total policy.
What Are the Regulations in Reinsurance?
The following are the important rules and regulations of reinsurance in India:
- The reinsurance companies in India are governed by the Insurance Regulatory Development Authority of India (IRDA).
- An Indian insurance or reinsurance company can undertake insurance business in India only if it has a registration with the IRDA.
- Purchasing an overseas insurance plan by an Indian insurance company is banned unless it gets approval from RBI.
- Corporate agents and insurance brokers are not allowed to perform in the same group.
- Indian corporate firms can only take in an insurer and insurance broker together in a group if conditions are met.
- There is no direct restriction on third-party administrators (TPAs) and insurers in a similar group.
- Insurers, insurance intermediaries, and insurance agents are allowed to possess directors in common.
- Under Companies Act 2013 and Accounting Standard 18, Web aggregators and telemarketers cannot be associated parties of an insurer.
- According to the IRDAI (Outsourcing of Activities by Indian Insurers) Regulations 2017, insurers or insurance intermediaries having registration with the IRDAI should not be involved in any activity of insurers.
- After IRDAI accepts Form IRDA/R1, an applicant can opt for a registration certificate by using Form IRDA/R2.
- The Form IRDA/R1 and IRDA/R2 should be submitted with proper documents and necessary details about the applicant.
- The procedure of documentation and fee structure differs from one entity to another.
What Are the Benefits of Reinsurance?
The following are some of the key advantages of reinsurance in India:
- Uplifts Insurance Business: Primarily reinsurance helps in the flourishing of the insurance business. It allows each and every insurer to consider insurance business as an entire risk to be divided among other reinsurers. When there is no reinsurance, it could be extremely difficult for an insurer to carry out the risks, especially if it surpasses their capacity.
- Safeguards From Natural Disasters: Sometimes, in the event of a natural disaster, plenty of policyholders may request for the claim of their policies. It is not very surprising that an insurance company will turn bankrupt paying too many policyholders. Under such circumstances, a reinsurance contract comes as an ideal solution to withstand the situation and helps in the reduction of financial stress on the insurer.
- Reduces Premium: One of the popular advantages of reinsurance in India is that it helps in lowering premium rates on insurance policies. In general, premium rates are computed as per the amount of loss the insurer had gone through previously. All of these data are taken into consideration by the reinsurance agreement, which also plans the premium rate for different types of risks under the agreement.
- Helps in Company Growth: Every insurance policy sold comes with several risk factors. Also, it has some additional costs like administrative costs, payments to sales agents, etc. Thus, the growth and expansion of an insurer are vital. Reinsurance helps reduce unearned payments burden by allowing an insurance company to concentrate more on flourishing their business and customers countrywide.
- Reduces Competition:The level of competition between insurance companies is reduced since everyone works cooperatively in the insurance business. Consequently, reinsurance enables managing competition and enhancing the productivity and morale among employees in the insurance organisation.
- Lessens Profit Fluctuations: The reinsurance policies help lessen the frequent fluctuations in a company's profit considerably to a large extent. On the contrary, if the retained risks of the original insurer are high, it can cause great financial distress owing to even a heavy loss.
- Reduces Dealings: Due to a reinsurance agreement, the insurer must concentrate on limited dealings with a single insurer. Without an insurance facility, the insured individual will need to fetch some insurers and enter into different insurance agreements. Consequently, it leads to huge costs, reduced pace of protection coverage, and massive time consumption.Now you know everything about what reinsurance is and its contribution to the progression of insurance business in India. So, insurers registered under IRDA can leverage its advantage to promote their business more fruitfully. If you need more guidance on how to opt for reinsurance services, you may contact reinsurance brokers.
FAQs on Reinsurance in India
There are three methods of reinsurance that are proportional method, non-proportional method, and facultative method.
Reinsurers earn revenue by choosing and accepting the policies which they consider less risky and reinvesting insurance premiums they get.
Some of the major roles of reinsurance include help transfer risk, lowering claimant payouts, and reducing capital requirements.
Important Guides related to Life Insurance
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.