When an original insurer who insures a risk again insured a part of risk with another insurer, this arrangement is called as reinsurance. In other words we could say that insurance is a contract between insurer and the original insured whereas reinsurance is a contract between the original insurer and the reinsurer.
The insurer transferring the business is called as the ‘principal or ceding or original office’ and where the business is transferred is called as ‘reinsurer or guaranteeing office ‘. In the contract of reinsurance principal must disclose all the facts to the reinsurer. The reinsurance amount is obtained by deducing the retention amount from the original policy amount.
Insurance Regulatory and Development Authority (Irda) has made it mandatory to the life insurance companies to reinsure with domestic reinsurers, a percentage of sum assured, on each policy and it will not exceed 30 per cent of the sum assured. As per the gazette notification, the retention limit lies between Rs 5 lakhs to Rs 30 lakhs and this limit is based on the age of the insurer and the type of the product.
Advantage of Reinsurance
- The principal insurer can take the risk to the extent of his limit and transfer the excess above the retention limit to another insurer.
- The reinsurance gives the stability and consistency in underwriting and underwriting results over a period respectively.
- It gives safety against the serious effects of combustion.
- It stabilizes the income & loss over time.