What are the important of re-insurance
Answers
In order to secure a large number of similar risks to permit the prediction of losses with a reasonable degree of certainty, insurance companies have devised the practice of reinsurance.
Reinsurance is the transfer of insurance business from one insurer to another. Its purpose is to shift risks from an insurer, whose financial security may be threatened by retaining too large an amount of risk, to other reinsurers who will share in the risk of large losses.
Reinsurance tends to stabilize profits and losses and permits more rapid growth.
The entire area of reinsurance and retrocession is an example of the essential need for spread of risk among many risk bearers. Much of the process goes on without the policy-holder being aware of its existence since he is not a party to the reinsurance arrangement.
Reinsurance enables a risk to be scattered over a much wider area which is the primary concept of the whole business of insurance.
The need for reinsurance arises in the same way as an original insured needs insurance protection.
Original insured is not a party to the reinsurance contract.
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Answer:
Reinsurance helps insurance companies to restrict the loss to their balance sheets, and in that sense, helps them to stay solvent. By sharing the risk with a reinsurer, insurance companies ensure that they can honour all the claims related to a particular risk.