Kathmandu. Insurance companies have to resort to reinsurance arrangements to allocate the risk they can afford. In reinsurance, one insurance company transfers most or part of its risk to another insurance company or reinsurance company.
In this way, when one insurance company transfers or re-insures the risk to another insurance company, the seeding company has to pay the premium as prescribed. Such a fee is commonly referred to as a reinsurance fee. Seeding refers to an insurance company transferring a portion of its accepted risk to the reinsurance company.
Reinsurance generally involves risk transfer through two types of contractual agreements, treaty reinsurance and faculty reinsurance. In some places, faculty reinsurance is also referred to as optional reinsurance.
Treaty Reinsurance:
A reinsurance contract is a long-term agreement under which the insurer and the reinsurance company already have a comprehensive agreement. Under this, the insurance company can automatically share all its certain classes of insurance with the reinsurance company.
In a contract reinsurance, the insurance company bears the initial risk of any insurance up to a certain limit and the risk beyond that limit is automatically transferred to the reinsurance company. For example, if an insurance company accepts a risk of Rs 1 crore insured and has a reassuring capacity of Rs 20 lakh per policy, then the remaining risk of Rs 80 lakh is transferred to the reinsurance company.
The risk allocation is agreed not on the basis of the sum insured but also on the basis of the percentage of the actuarial of the accepted risk. If an insurance company shares 50 percent of its entire “motor insurance portfolio” under a risk reinsurance agreement, the reinsurance company is automatically responsible for bearing a risk equal to 50 percent of all motor insurance policies issued by that company.
Both types of insurance companies already have an agreement — the insurance company negotiates which types of insurance to recover.
Reinsurance is based on a long-term agreement. This ensures the long-term sustainability of the insurance company. For the reinsurance company, it is also a guarantee of long-term business.
Once the agreement is signed between the two insurance companies, the risk of the insurer is automatically transferred to the insurer for the duration of the agreement. Before transferring the risk, the insurer should inform the insurer in writing about the nature, condition and sum assured (sum assured) of the risk.
Based on the proposal received from the insurance company, the reinsurer gives an opinion to accept the risk, amend the actuary or reject the proposal. Based on the opinions received, the insurance company should decide whether or not to accept the risk of insurance.
The nature of the risk to be borne under such a policy and the extent of the sum insured are explained in the terms of the agreement between the two insurance companies. So you don’t have to exchange terms every time. This facilitates both the insurer and the reinsurer to automatically transfer the risk and accept the risk automatically.
Faculty Reinsurance:
Faculty reinsurance agreements are of a fragmented nature rather than a continuous nature like reinsurance. That is, it is remittance-based. In which the insurance company has to offer each insurer a separate reinsurance to the reinsurance company and get approval.
This type of reinsurance is usually offered only in the case of a specific type of risk or policy, not for a regular type of insurance or risk. For example, the faculty may be reinsurance for all types of risks related to the domestic tournament Nepal Premier League (NPL) related to cricket.
Since such risks are only for the duration of the tournament, special agreements may be required. For each tournament, the Nepali insurer should make an agreement with the insurance company for each tournament to provide insurance to the foreign visiting players, to provide compensation in case of the cancellation of the match, to provide compensation in case of interruption of the live telecast of the game, to provide accident insurance to the other teams participating in the match, to compensate the organizer for the loss of the match, to cover the risk of damage to the physical infrastructure of the ground.
The insurance company sends an offer to the reinsurance company every time for a risk of a larger or special nature. The reinsurance company can accept or deny that particular risk. The insurance company has the freedom to make or not to offer reinsurance and the reinsurance company has the freedom to accept or reject the offer.
It is based on a slightly longer and cumbersome process than treaty reinsurance. A separate paperwork has to be completed for each insurance.
