10 Important Terminologies Used in Reinsurance
Before proceeding to the study of reinsurance, it is required of the students to understand the meaning of certain terminologies commonly used in the transaction of reinsurance business. In the absence of such understanding the student is likely to get confused and the study might mean obsolete to him. The terminologies used in reinsurance are :
1. Re-insurance/Reassurance : This means insurance of insurance. The original insurer gets the risk, assumed from the original insured (primary insured), covered (reinsured) with another insurer known as reinsurer) for the same reason as the primary insured does. The primary insurer, here, in fact becomes the insured (known as reinsured) and the person or body or company giving him the protection becomes the insurer (known as reinsurer)
2. Re-insurer/Reassures : Meaning the person, body or company giving reinsurance cover. They protect the interest of the insurer in case of loss/damage of the property or subject-matter insured and for which the insurer is liable under the policy of insurance.
3. Re-insured/Reassured/Ceding Company/Direct Company/Primary Or Original Insurer : All these terms relate to or indicate or identify the insurer who primarily assumes the risk from the primary insured and then gets the same re-insured according to need. When, therefore, an insurer re-insures the risk he becomes known as re-insured/reassured/ceding company/direct company/original or primary insurer.
4. Ceding Company : The company ceding the risk, i. e., getting the risk reinsured, and has already been discussed.
5. Cession: Means the amount of risk ceded for reinsurance, i. e., the amount reinsured.
6. Retrocession: Means reinsurance of reinsurance. A reinsurer may like to get his interest protected by further reinsurance and so on.
7. Retention: This refers to the amount of risk retained by the ceding company. The balance is usually reinsured. The amount of retention is basically dependent on the financial strength of the ceding company for that class of business. It is the refined figure of another term known as LIMIT. Normally —Limit is a rough guide of the ceding company, and depending on the quality and nature of the risk the ceding co. may decide to enhance or reduce the limit for the purpose of actual retention.
8. Line: A line is equivalent to retention, i.e., the amount retained by the ceding co. A reinsurance arrangement is usually expressed in terms of “line” meaning that if a ceding company has got a ten-line or twelve-line reinsurance arrangement (TREATY) it can automatically cede or reinsure up to ten times or twelve times of the amount retained.
9. Primary Insured/Assured: This refers to the primary insured (assured) originally insuring the risk at the first instance. He is one of the parties to the insurance contract and not in the reinsurance contract.
10. Reciprocity: This is a widely used term in the transaction of the business of reinsurance, indicating a situation involving desire for the satisfaction of mutual interest. Normally, the direct insurers, at one time or the other, do transact reinsurance business also in addition to insurance business. When they cede reinsurance business as such to another company they also expect that at different times that company also would cede reinsurance business to them. This understanding of looking after each other interest is expressed by the term “Reciprocity“.