Briefly discuss the reinsurance and the covers available under reinsurance to a primary insurance company?also discuss how reinsurance affects rate making of a primary insurance company?(please answer in 200 to 250 words)
Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim. The party that diversifies its insurance portfolio is known as the ceding party. Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit their own total loss in case of disaster. By spreading risk, an insurance company takes on clients whose coverage would be too great of a burden for the single insurance company to handle alone.
Some of the the covers available under reinsurance to a primary insurance company includes Non-proportional reinsurance which obligates the reinsurer to pay losses when they exceed a designated threshold. Another cover is facultative arrangement that enables both the primary insurer and the reinsurer retain full decision-making powers with respect to each insurance contract.
Insurance rates usually which are used in rate making are revised only slowly, and, since they are based upon past experience, they tend to remain out of date making the primary company tyo incur a lot of losses.