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Reinsurance is a large and complex industry. Insurers are legally required to have sufficient capital in reserves to pay all potential claims related to their issued policies.
Thanks to this regulation, consumers' losses will be covered even if their insurance company goes under. However, reinsurance lowers an insurer's liability potential, and therefore it can reduce the amount of capital the insurer is required to maintain in reserves.
Treaty and facultative reinsurance policies can be proportional or nonproportional in structure. A proportional reinsurance also known as "pro rata" reinsurance agreement obligates the reinsurer to bear a portion of the losses, for which it receives a prorated share of the insurer's premiums.
Non-proportional reinsurance also known as "excess of loss" reinsurance agreements kick in when the insurer's losses exceed a set amount. This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular.
Your input will help us help the world invest, better! Licensed reinsurers are subject to the same state-based regulation as other licensed insurers. When an insurer cedes business to a licensed reinsurer, the cedent is permitted under regulatory accounting rules to recognize a reduction in its liabilities in the amount of ceded liabilities, without a regulatory requirement for the reinsurer to post any collateral to secure the reinsurer's payment of the reinsured liabilities.
A reinsurer that is licensed to accept reinsurance in a state or territory is an Authorized Reinsurer. An insurer that is not licensed or otherwise approved to accept reinsurance is an Unauthorized Reinsurer. Companies that are domiciled in Qualified Jurisdictions can become Certified Reinsurers after completing additional review by the states and this status allows the reinsurers to reduce the collateral required. Additionally, companies that have a head office or are domiciled in Reciprocal Jurisdictions can become Reciprocal Jurisdiction Reinsurers if they meet the standards detailed in the Credit for Reinsurance Model Law and Credit for Reinsurance Model Regulation , and this status will allow these companies to not post collateral.
The revisions also provide Reciprocal Jurisdiction status for accredited U. 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. Speak to an insurance specialist now!
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