Non-life insurance buys reinsurance to protect its capital base against large deviations from expected loses. This is most essential in case of catastrophic losses.

Reinsurance allows non-life insurers to accept more business with the same amount of capital. By buying reinsurance coverage, insurers transfer risk to reinsurers and do not allocate capital for these risks. Thus primary insurer can spread their overhead cost of distribution network, administration and claim handling over a broad base of business and thereby benefit from economies of scale.

Reinsurers play a key role in the assessment and underwriting of risk. They also ensure the continuous supply of insurance coverage to companies in the time of market distress. Reinsures operates in international environment and they have long term experience, which helps in effective claim settlement to the benefit of insurers and policy-holders.

Life Insurance

Life insurers buy reinsurance to minimize the potentially negative impact of large risks. Life insurers want to limit their exposure to high sum assured for individual risks or to avoid an accumulation of mortality risk in case of group cover schemes. Moreover, long term reinsurance contracts protect insurers against claims variations, for instance, variations in mortality over time.

One of the major reasons for entering into reinsurance contract is that reinsurers provide expertise in underwriting and claim management as well as on pricing and product development. Since reinsurers operate globally, they have broad and deep understanding of markets, products and also large data of insured populations. Thus, reinsurer assists primary insurers with high quality underwriting tools, training to insurer's underwriter and other skills. They also help in claim management by providing guidelines on claims assessment and training of insurers and ultimately benefiting policy-holders also. Reinsurers' broad expertise also helps insurers in product development and pricing of new products. Insurers can refine risk into broader classes and can minimize their exposure with the help of innovative products. Since they mainly focus on savings and investment business, life reinsurer allows them to transfer some proportion of mortality and disability risk component.

Reinsurance helps to reduce capital strains. By transferring risk, life insurers can reduce their capital requirements and can use the freed-up capital into new lines of business expansion or new geographical areas. As a protection business, they require huge capital and reinsurance helps to ease this strain.

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* Contributed by: -
Jaya Nema,
Faculty - MBA (Finance & Marketing),
Laxmi Narain College of Technology, Indore.