Page 159 - Risk Management in current scenario

Reinsurance
Reinsurance is an important tool for mortality risk management where
the insurance company purchase insurance from another company known
as Reinsurance Company. Reinsurance companies are generally globally
in nature and they spend lot time and money in the research of human
mortality; so they are better placed compared to insurance companies
in taking the mortality risk.

There are different types of reinsurance, however, most common type
of reinsurance where insurance company retain certain sum assured and
pass rest to the reinsurance company. For example, one reinsurance
arrangement could be that the insurance company will retain the sum
assured of Rs.20 lacs and pass rest to the reinsurance company.

For example, if insurance company write five lives of sum assured, 5 lacs,
15 lacs 25 lacs, 50 lacs and 1 Cr. So if the retention limit is 20 lacs, then
insurance company retains the full sum assured from 1st and 2nd policy
of 5 lacs and 15 lacs each of sum assured is less than 20 lacs. From the
third policy, if claim arises, insurance company will pay 20 lacs and
reinsurance company will pay 5 lacs. From the 5th policy, insurance
company will pay 20 lacs and rest 80 lacs will be paid by the reinsurance
company.

It may be seen that the insurance company has capped their maximum
claims to 20 lacs. The insurance company is to pay premium to the
reinsurance company in place of this reinsurance. It may be noted that
by effecting the reinsurance arrangement, insurance company has
reduced the claim volatility from its portfolio.

Thus, reinsurance is one of the important tools of mortality risk
management which enable insurance companies to reduce claims
volatility, able to write large sum assured cases, able to withstand
concentration risk and help in the claims underwriting and design of the
products

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