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The Need For Reinsurance

The Need for Reinsurance:

What is insurance?

Insurance is all about risk. Risk is caused by the fear of the unknown .Unknown breeds uncertainity. Insurance is all about preventing the uncertain or the tragedies of the future from affecting you financially.

The loss of a loved one cannot be replaced. However a financial compensation helps to lighten the loss to an extent. Insurers collect a premium in order to bear your risk. Insurers do not have much of a problem creating a risk pool for health or life insurance for a number of people.

A risk pool is basically a number of people take up insurance policies and the premiums are used to create a pool. This pool is the source of funds and compensates you and other people who might fall ill or lose their lives. Obviously all people in the pool cannot fall ill or die. Those who do not fall ill or die compensate those who fall ill or die.

What is reinsurance?

Insurers do not have a problem bearing risk pertaining to your life and health. The risk pool takes care of that as the chances of all the individuals dying or falling ill at the same time is highly impossible.

Let us consider an airline Company insurers its fleet of airliners. An airline disaster could cause claims in Crores of rupees from a destroyed aircraft and the loss of life of passengers in the air and causalities on the ground.

These claims could financially cripple the Insurer. In order to avoid this risk Insurers insure these risks with another insurer and pay a premium .This is called reinsurance. Reinsurers bear the high cost of a loss due to a damage or a claim which could financially cripple the Insurer. They in turn charge a hefty premium from the insurer to bear the risk. Most of the reinsurers are Global players and they bear this risk.

So why reinsurance:

You must be remembering the September 11th 2001 terror strikes in the US where planes crashed into the World trade center and the Pentagon. The damage claims were in millions of dollars which could have crippled insurers. However they landed up crippling the reinsurers. This was a rare event and normally reinsurers do not have to settle such high claims.
Insurers are frightened of such unforeseen huge losses and insure themselves against such huge massive losses. This breeds the need for reinsurance.

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