IMPORTANCE OF REINSURANCE BUSINESS
To sum up in a systematic disciplined way the causes for reinsurance may be grouped as under:-
RISK MINIMIZATION BY SPREADING
The fundamental concept of insurance is to spread the chance over as wider a location as possible as so to reduce the burden of loss at each stage.
Reinsurance enables a risk to be scattered over a much wider area and the principle of insurance is taken proper care of. This really helps in the greatest viability of insurance operation.
RISK TRANSFER
To an insurer, the necessity for reinsurance protection arises in exactly the same way since the insured needs insurance protection.
However for reinsurance, the business enterprise of insurance would not are suffering from to the extent of the present day growth.
FLEXIBILITY
In the lack of reinsurance, insurers could have been bound to limit their acceptance of risk only around such an amount which they could possibly digest.
Quite simply,
the insurers could have been unable to just accept a risk beyond their financial strength or resources for that class of business. Consequently, insurers'service to the public would also have now been limited.
Reinsurance provides a flexibility to insurers by making a condition which enables them to just accept a risk beyond their financial capacity or resources.
The insuring community can be left care-free with regard to various risks to which they are put through, irrespective of whatever will be the value per single risk.
ACCUMULATION
Reinsurance reduces the likelihood to getting involved with undesirable additional risk-load, that is otherwise eminent from the accumulation of risks originating from different sources.
Examples of such accumulation are,
(a) Heavy commitment on the cargoes of exactly the same vessel,
(b) Heavy commitment on the cargoes lying in exactly the same port possibly due to the arrival of all vessels at the same time and,
(c) The heavy commitment of an insurer on the property of a specific hazardous locality from the viewpoint of fire or conflagration fire.
It is possible that the different branches of an insurer, without knowing each other's position, may commit individually thereby giving rise to a predicament of heavy unbearable commitment as stated in (a) (b) or (c) above.
Reinsurance reduces such worries of insurers and keeps down the pressure of accumulation to a sustainable limit.
DEVELOPMENT
The growth of an insurance company is very determined by sound financial standing, that is primarily on the basis of the stability of profit and loss. Profit cannot be expected if there is an untoward charge on the fund by means of claim which it cannot sustain or for which there's no provision.
Reinsurance has a tendency to stabilize profits and losses and permits more rapid growth of an insurance company.
PREDICTION FOR RATING
An insurer will need a large number of similar cases in his book for the goal of predicting an exact rating structure.
But assuming a large number of similar risks is in itself undesirable unless some precautionary measure is taken.
It might not also be possible to acquire a large number of similar cases by an insurer due to the operation of numbers of insurers in the market. Whatever it's, reinsurance protects such a predicament in both ways.
On the main one hand, it gives protection to the insurer by means of providing unsustainable losses, and on another creates a community for finding a large number of, similar cases through reciprocity.
NEW INSURER
A brand new insurer who has recently started transacting insurance business cannot certainly develop and possibly cannot survive in the lack of reinsurance protection..
RISK MINIMIZATION BY SPREADING
The fundamental concept of insurance is to spread the chance over as wider a location as possible as so to reduce the burden of loss at each stage.
Reinsurance enables a risk to be scattered over a much wider area and the principle of insurance is taken proper care of. This really helps in the greatest viability of insurance operation.
RISK TRANSFER
To an insurer, the necessity for reinsurance protection arises in exactly the same way since the insured needs insurance protection.
However for reinsurance, the business enterprise of insurance would not are suffering from to the extent of the present day growth.
FLEXIBILITY
In the lack of reinsurance, insurers could have been bound to limit their acceptance of risk only around such an amount which they could possibly digest.
Quite simply,
the insurers could have been unable to just accept a risk beyond their financial strength or resources for that class of business. Consequently, insurers'service to the public would also have now been limited.
Reinsurance provides a flexibility to insurers by making a condition which enables them to just accept a risk beyond their financial capacity or resources.
The insuring community can be left care-free with regard to various risks to which they are put through, irrespective of whatever will be the value per single risk.
ACCUMULATION
Reinsurance reduces the likelihood to getting involved with undesirable additional risk-load, that is otherwise eminent from the accumulation of risks originating from different sources.
Examples of such accumulation are,
(a) Heavy commitment on the cargoes of exactly the same vessel,
(b) Heavy commitment on the cargoes lying in exactly the same port possibly due to the arrival of all vessels at the same time and,
(c) The heavy commitment of an insurer on the property of a specific hazardous locality from the viewpoint of fire or conflagration fire.
It is possible that the different branches of an insurer, without knowing each other's position, may commit individually thereby giving rise to a predicament of heavy unbearable commitment as stated in (a) (b) or (c) above.
Reinsurance reduces such worries of insurers and keeps down the pressure of accumulation to a sustainable limit.
DEVELOPMENT
The growth of an insurance company is very determined by sound financial standing, that is primarily on the basis of the stability of profit and loss. Profit cannot be expected if there is an untoward charge on the fund by means of claim which it cannot sustain or for which there's no provision.
Reinsurance has a tendency to stabilize profits and losses and permits more rapid growth of an insurance company.
PREDICTION FOR RATING
An insurer will need a large number of similar cases in his book for the goal of predicting an exact rating structure.
But assuming a large number of similar risks is in itself undesirable unless some precautionary measure is taken.
It might not also be possible to acquire a large number of similar cases by an insurer due to the operation of numbers of insurers in the market. Whatever it's, reinsurance protects such a predicament in both ways.
On the main one hand, it gives protection to the insurer by means of providing unsustainable losses, and on another creates a community for finding a large number of, similar cases through reciprocity.
NEW INSURER
A brand new insurer who has recently started transacting insurance business cannot certainly develop and possibly cannot survive in the lack of reinsurance protection..
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