What is Reinsurance & How Does It Help?

2021-08-11

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Insurance as an industry is no longer limited to life insurance policies. The industry has expanded to the extent where it covers vehicles, buildings and even one-off events. Insurance is now a mandate for everything owing to the enormous potential it offers to save costs in case of any unexpected problems later.

However, Life insurance policies continue to be the most popular product offered by the insurance industry. Online term plans such as the iSelect Smart360 Term Plan by Canara HSBC, continue to grow in popularity owing to their ability to offer policyholders customization according to their own specific needs for coverage. Policyholders availing this plan can also benefit from a range of inbuilt coverage such as the Accidental Death Benefit, Child Support Benefit and Permanent Disability Benefit.

Reinsurance has emerged as a concept to offer coverage to the insurance industry. It helps protect the insurers who face excessive claims from different quarters, both individuals and companies, and for different reasons. Since insurance companies work on the principle of collective risk wherein only a few policyholders are expected to lodge claims within a particular timeline, reinsurance comes in at a time when insurers are expecting larger-than-normal payouts.

Key Takeaways

In times of excessive claims, even insurance companies need a safety net called reinsurance for financial stability.
To manage large-scale payouts, insurers opt for risk-sharing, especially during natural disasters.
Reinsurance allows insurers to take on as many customers as they can with broader policy coverage without financial strain.
It allows insurers to enhance their financial strength by offering capital relief and stabilising their balance sheet.
It enables insurers to tap into global expertise, enhancing their ability to assess risks accurately and manage claims more effectively.

Types of Reinsurance

At times, such as in years of heavy monsoons and floods, insurer companies anticipate having to pay more claims owing to people facing more losses and damages to homes, other property, and even their vehicles. At such times, the insuring company pays a certain proportion of the premiums they have collected and pays it to the reinsuring company which then takes on the responsibility of helping share its losses.

Owing to increased digitalization of the insurance industry, it is much easier for people to buy online term plans. This has resulted in a higher number of people buying online term plans which require minimal documentation and time. The iSelect Smart360 Term Plan, available on Canara HSBC, enables you to choose the different requirements you have from the insurance plan and pay premiums online. You can customize your plan on the basis of whether you want life coverage, or you want a plan with coverage for life with a return of premium. You can also choose the optional covers you want to include in your plan and select whether you want to include your spouse in the plan. Once your plan is tailored according to your specifications, you can simply pay premium online.

In times when it is so easy for people to avail life insurance policies, reinsurance takes on an increased importance. There are two types of reinsurance, read on to learn more about them.

Treaty Reinsurance: Within this type of reinsurance, the reinsurer agrees to provide blanket coverage for all the policies written as well as those that have not been written by the insurer company for a specified duration of time. It can often prove risky for the reinsurer in case they have not studied all the policies issued by the insurer in depth.
Facultative Reinsurance: With this kind of reinsurance, a reinsurer offers coverage on each particular policy as a single transaction. Since the policies are not grouped together here, it offers the reinsurer greater scope to carefully analyze their risks and then undertake as to whether they wish to cover a part of the policy or the entire policy.

Most reinsurance policies are made on a proportional basis, wherein the reinsurer agrees to receive a certain proportion of the premiums collected for the policies it has undertaken the risks for.

Reinsurance is helpful for the insurance industry in several ways. Read on to learn more about how reinsurance helps the industry.

Reinsurance enables insurance companies to stay solvent by restricting their own losses. Sharing the risks with a reinsurer enables companies to honour the claims raised by people without being worried about too many people raising claims at the same time.
The main benefit of reinsurance lies in the insurer restricting losses to their own balance sheets. This situation is likely to arise in times of natural calamities when too many claims are raised at the same time, and insurers might be required to settle them all.

Reinsurance is especially helpful for the insurance industry at times when people can just buy online term plans which offer a range of benefits from the comfort of their own home. With the iSelect Smart360 Term Plan, available on Canara HSBC, you can customize your plan and even get a discount on the premium you pay for insuring your spouse.

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Benefits of Reinsurance

One of the most crucial approaches an insurer takes for financial security and operational stability is getting reinsurance. The primary objective of having it is risk management, but its additional benefit would include coverage expansion, which can make them market leaders. Some of the major benefits of having reinsurance are:

1. Risk Diversification for Insurers

Reinsurance is a ticket to spread risk across multiple markets without any fear of insolvency. By transferring their liabilities to a reinsurer, insurers create a safety net and can even expect stability during high-claim situations.

2. Capital Relief & Financial Strength

It allows insurance companies to retain their capital reserves and focus on expansion and building financial strength. Without any worries of exhausting the capital, insurers can operate better even during challenging times.

3. Increased Policy Coverage Capacity

Reinsurance is what lets insurers underwrite larger policies. They are relieved of the worries of excessive claims and are open to serving more customers and offering an even wider range of coverage options.

4. Stabilisation of Financial Results

The main purpose of having reinsurance is to prevent significant losses. This practice, in turn, helps insurers to maintain a stable financial result, especially during economic downturns, such as natural disasters when the claim surges.

5. Access to Global Insurance Expertise

Since reinsurers are equipped with the understanding of global risk management expertise, they bring knowledge and insights from the worldwide trends. Insurers can learn several things from them, such as advanced risk assessment models and underwriting techniques.

Did You Know?

In India, reinsurance played a critical role in settling claims during the COVID-19 pandemic, helping life insurers manage over ₹20,000 crore in claims.

Source: IRDAI

Challenges & Risks in Reinsurance

There are always two sides to a coin, and as many benefits as reinsurance has, it also carries its own set of drawbacks. Some of the major challenges that you can expect from reinsurance agreements are listed below:

Since you need to pay a premium for reinsurance, it can impact an insurer’s profitability.
The primary insurer falls on counterparty risk, which means that if the reinsurer faces financial instability, the prior’s ability to support the claim may also be affected.
The regulatory compliance can be pretty complex to understand with multiple frameworks.
Relying too much on reinsurance can reduce the insurer’s independent decision-making due to external interference.

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How to Choose the Right Reinsurance Partner?

So far, it is understandable that having reinsurance can open several doors for an insurer, but finding the right one is also a task in itself. A well-matched reinsurance partner not only ensures financial security but also helps insurers manage risks efficiently and sustain their long-term growth. These are the factors to consider when choosing one:

Ensure the reinsurer has a strong financial position and strength that guarantees stability.
You must look for a reinsurer that has industrial expertise and a proven track record of handling diverse risks.
Always check whether the reinsurer complies with the national as well as international insurance regulations.
Verify how efficiently they handle a claim and how prompt their financial support is.
Ensure that the reinsurer’s risk strategies align with the insurer’s and both parties’ risk appetites match.

Conclusion

The importance of reinsurance is huge for an insurer. As it helps the latter run its operations smoothly as a trustable choice in the marketplace. By getting rid of the financial risks, enabling broader coverage and stabilising its financial outcomes, reinsurance acts as a backbone of the insurers. Meanwhile, it also plays an indispensable role in streamlining the insurance industry as a whole.

Glossary

Reinsurance: Insurers transfer their portions of risk to another company to protect against large claims.
Facultative Reinsurance: The policy is considered individually for coverage by the reinsurer.
Treaty Reinsurance: The reinsurer covers all or a group of policies under a pre-decided contract.
Counterparty Risk: This refers to the risk that the other party in a financial agreement may default on its obligations.
Solvency: This is the financial ability of an insurer to meet its long-term debt and claim obligations.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.