The Concept Of Reinsurance Business: A direct company may find that it has placed itself under liability to a very large number of policy-holders. It may consider that it has undertaken more than it can safely carry. Therefore, the company, because of its outstanding contractual obligations, may desire to protect itself. It may seek to lessen its burden by getting some other company to assume a part of its liability in case of a loss. The ORIGINAL OR PRIMITIVE OR DIRECT insurer, as is often called to represent direct-writing company, may transfer or cede the whole or part of a risk to another company. The first insurer or ceder in turn enters into a contractual relation with the second company which is called the REINSURER.
The original or the primary insurer is obligated directly to his insured or the policy-holder. The reinsurer is obligated to the ceding company. The original insurer has to account to its original assured in case of loss under a primary policy.
The direct company, known as the reinsured, by its contract may obtain the power to collect from the reinsurer by reason of the loss suffered by the original assured under the terms of the original policy. From the business relationship established between the reinsurer and the reinsured, there may origin a contract of reinsurance.
We should appreciate that the risk assumed in reinsurance is necessarily to be determined by examining the intention of the parties to reinsurance contract itself; since it may so happen that the risk covered by the reinsurance contract is not the same as that covered by the original policy.
It should be recalled by us that the primary concept of insurance is to spread the risk or loss of one onto the shoulders of many. Whilst it becomes unbearable for a man alone to bear the load of a loss, it becomes quite easier when a group collectively shares the same. This is the Concept Of Reinsurance Business in the insurance world.
It is indeed sharing and resharing of risks or spreading and further spreading of risks. Or may be termed as consortium coverage of risks.The necessity emerges out of the same need as is felt by the original assured. Reinsurance is not double insurance or co-insurance since in such contracts, unlike reinsurance, there is a direct contractual relationship in between the insured and insurer or co-insurer.