Term of the week: Reinsurance

Reinsurance is the process by which an insurance company (reinsurer) takes on all or part of the risks of the policies issued by another insurance company.

All life, health and other general insurance companies take reinsurance. The main objective is to distribute the risks in their books. It assumes significance especially in case of natural disasters such as cyclone and earthquake, when there are large-scale claims and individual insurance companies can’t handle them on their own. Large numbers of claims could actually bankrupt the insurance company. To avoid this risk and settle claims smoothly without jeopardising their balance-sheets, insurance companies reinsure their risks.

The consideration for re-insurance is paid in the form of premium to the reinsurer. In India, in addition to GIC (General Insurance Corporation of India) reinsurance services are also provided by ITI Reinsurance (the private re-insurer in India), foreign companies such as Swiss Reinsurance and Lloyd’s India Reinsurance and Score SE.

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