Page 280 - Ebook health insurance IC27

The Insurance Times

Questions and Answers

Q1. Define Reinsurance, explain the concept of reinsurance.
Ans. Reinsurance is a risk transfer mechanism. It provides a method for insurance

companies to diversify their risks by contributing a part of the premium received
from customers to a reinsurance company, and receiving the corresponding claims
incurred from theReinsuranceCompany. So, basically, Reinsuranceis the Insurance
for Insurers.

When the reinsurance contract is proportional to the original insurance contract, it
is called quota share reinsurance. Another type of Reinsurance is, where all
premium above a certain amount is ceded to the reinsurer and all claims above
that amount are received from the Reinsurer.

Both the above mentioned policies function on 'per policy' basis. Another type of
Reinsurance is there, which is structured at the portfolio level. It is called 'Excess
of Loss' reinsurance structure. In this structure, when the claim ratio for a given
block of business goes beyond a certain level, the reinsurer would be on risk to
pay for these claims.

Q2. Discuss the utility of reinsurance with the help of Grid.
Ans. Reinsurance serves as a risk transfer mechanism for insurance companies. For

e.g, a single catastrophic event such as Aila / Tsunami can lead to a large number
of claims forthe insurer. In thesekinds ofsituations, the insurersare under significant
pressureinliquidity-and iftheclaims arelargeenough, can resultinactual liquidation
of assets to pay for the huge claims. A reinsurance structure provides the insurer
with the ability to equalize claims payouts with management of liquidity.

284 Guide for Health Insurance