We should get ourselves acquainted with a very common term, known as retrocession, widely used in reinsurance transactions. But what is retrocession in insurance? OK. This virtually means reinsurance of reinsurance. Again, What is the Importance Of Reinsurance and Retrocession To Insurance Companies?
It should be appreciated by the visitors that reinsurance enjoys no immunity from the operation of the principles governing sound practice for insurers. The reinsurer also must avoid a concentration in conflagration areas or catastrophe situations, and must maintain a wide distribution of its risks assumed from the ceding company.
It is probable that the reinsurer may have sufficient amounts ceded from a number of different sources and unfortunately the cession may relate to the same risk. To relieve itself from this undesirable accumulation, the reinsurer would itself have to resort to reinsurance. This act of reinsuring any part of a reinsurance is termed as retrocession and comes within the same study of reinsurance.
Importance Of Reinsurance To Insurance Companies
- In order to secure a large number of similar risks to permit the prediction of losses with a reasonable degree of certainty, insurance companies have devised the practice of reinsurance.
- Reinsurance is the transfer of insurance business from one insurer to another. Its purpose is to shift risks from an insurer, whose financial security may be threatened by retaining too large an amount of risk, to other reinsurers who will share in the risk of large losses.
- Reinsurance tends to stabilize profits and losses and permits more rapid growth.
- The entire area of reinsurance and retrocession is an example of the essential need for spread of risk among many risk bearers. Much of the process goes on without the policy-holder being aware of its existence since he is not a party to the reinsurance arrangement.
- Reinsurance enables a risk to be scattered over a much wider area which is the primary concept of the whole business of insurance.
- The need for reinsurance arises in the same way as an original insured needs insurance protection.
- Original insured is not a party to the reinsurance contract.