Reinsurance

@#. Reinsurance
Reinsurance is insurance for insurance companies. It is a way of transferring the financial risk of one company to another company. Here the first insurance company is insured and who take the reinsurance they are reinsurer. Reinsurance is very important on the insurance environment because with out reinsurance the movement of insurance industry become bolt.
When an insurance company can not bear the over lode of his company risk then the company transfer the risk to the other insurance company that is reinsurance.
@#. Show the advantage of reinsurance.
Ans: There are some advantages of reinsurance. They are given below: -
1. The original insurer can accept the risk to the extent to his limit. In absence of reinsurance a person need to take money policy.
2. Reinsurance contract makes it possible to purchase only one policy form an insurer.
3. Reinsurance minimizes an insurance company overloaded risk.
4. It reduces the insurance company’s burden of loss at each stage.
5. It transfer risk form one company to another company.
6. The reinsurance makes stability in underwriting and consistency in underwriting results over a period.
7. It provides a safe guard against serious effects of fire.
8. The reinsurance has the effect of stabilizing income and losses over a period of year.
@#. Discuss about the limitation of reinsurance.
Ans: There are some limit of reinsurance are given below: -
1. The financial status and premium income of the insurer. A new insurer with small premium income can not afford to sustain a loss
2. The experienced in a particular class of risk:
a) The degree of the fire hazard present
b) The extent of the damage likely to be sustained
c) The fire extinguishing facilities available
3. The limit will vary according to nature and size of concerns proposing for insurance.
4. Location and other factors also affected upon the limit of risk.

@#: Reason for reinsurance.
Many reasons are present in the insurance environment for the reinsurance. These reasons are present here:-
1. Risk minimization by spreading: By the reinsurance an insurance company minimization there overloaded risk.
2. Flexibility: By the reinsurance insurance company the burden of loss at each stage.
3. Risk transfer: By the reinsurance an insurance company transfer risk to another insurance company.
4. Accumulation: Reinsurance reduces the additional risk load of the insurance company.
5. Development: The growth of insurance is particularly dependent on sound financial standing which is based on the stability of profit and loss. Reinsurance tends to stabiles profit and losses and permits more rapid growth of an insurance company.
6. New insurer: The new started insurance company whose business cannot certainly develop they cannot survive in the absence of reinsurance protection.
7. Prediction for rating: An insurer needs to have large number of similar cases in his book for the purpose of predicting an accurate rating structure.


@#. Discuss the method of reinsurance.
Ans: There are three method of reinsurance. They are given below –
1. Shopping or street reinsurance: Under this method there is no standing agreement regarding reinsurance of risk of one company by another company. Each policy is treated on an individual basis. The reinsurer is sought only when the need of reinsurance on a policy arises.
2. Facultative reinsurance: The essential feature of this method is that the reinsurer is offer the particular of original contract. The reinsurer will see the plan and report on the risk offered for reinsurance. The insurer may qualify the acceptance subject to plan and report. The ceding office may retain the certain amount of insurance. The agreements do not make it binding upon Reinsurance Company to provide reinsurance on particular risk.
3. Automatic or treaty reinsurance: Under the method there is an agreement between the ceding office and Reinsurance Company that the amount of insurance on a policy above the retention of the ceding office will be submitted by it for reinsurance and the same will accepted by Reinsurance Company.
@#. Different treaties in reinsurance.
Ans: Treaties are of various types and the important ones are –
1. Quota share treaty: This type of treaty requires the direct insurer to cede a predetermined proportion of all its business accepted in a certain class to the reinsurers and the reinsurers also agrees to accept that proportion in return for a corresponding proportion of the premium.
2. Surplus treaty: The important feature here is this that the direct insurer agrees to reinsure only the surplus amount, after its retention, and the reinsurers agree to accept such cessions, usually up to a predetermined upper limit.
3. Excess of loss: Under this system unlike facultative, quota or surplus, this sum – insured does not from any basis and it is not expressed in terms of proportion or percentage of the sum – insured here, the insurer first decides as to how much amount of loss he can bear on each and every loss under a particular class of business. The agreement such that if a loss exceeds this predetermined amount then only reinsurers will bear the balance amount of loss. Nothing is payable by the reinsurers if the amount of loss falls below this selected amount. There may usually be an upper limit of liability of the reinsurers beyond which they will not pay.
4. Excess of loss ratio: This type of agreement is also known as STOP LOSS reinsurance and is a bit different from the excess of loss arrangement, even though both basically base on loss rather than sum – insured. Here, a relationship usually drawn in between the gross premium and the gross claim over a year in a particular class of business. The ceding company decides a gross loss ratio up to which it can sustain. The arrangement with the reinsurers is such that if at the year and it is found that the total of all losses with in the class has exceeded the predetermined loss ratio than the reinsurers will pay the balance loss so as to keep the loss ratio of the ceding company with in the predetermined ratio. The treaty may contain an upper limit also.
5. Pool or Syndicate Method: Pools usually operate in respect of especially hazardous classes of business or where the market as a whole is weak to absorb the risk.
@#. Application of reinsurance to various branches of insurance.
Ans: Indications will now be made as to the proper applicability of various types of reinsurance in different branches of insurance.
1. Fire: Surplus treaty is most widely used. Quota share treaties are used by the newly established companies or with regard to new business of established companies.
2. Marine and Aviation: Quota share at the surplus are quite common even though facultative method is still very widely used.
3. Accident: All types of treaties are commonly used
4. Life: The most commonly used type is the surplus treaty. Facultative cover is also still in use although in a very limited degree.
Chapter 06 – Insurance Market

@#. Distinctions between representation and warranties.
Ans:
Representation Warranties
1. A representation is required to be substantially true, i.e. the material portion of the statement must be literally true even though the immaterial portion of the statement need not be true or correct. 1. Warranty must be strictly and literally complied with.
2. With regard to representation if the insurer wants to avoid the contract on grounds of misrepresentation, it has to be proved by the insurers that the misrepresentation relates to a material fact. 1. With regard to warranty any breach whether material or immaterial is enough for the insurers to avoid the contract.
3. A representation does not appear In the policy. 3. A warranty must appear in the policy either expressly or by way of reference.

@#. What is assignment of fire insurance policy?
Ans: Assignment in fire insurance can not be recognized without prior consent of the insurer, change of interest in fire policies are not valid unless and until the consent of the insurer has been given. The fire policies are not in the nature of assignment nor intended of to be assigned from one person to another without the consent of the insurer. Assignment in fire insurance constitutes a new contract.

@#. What do you mean by particular average loss and constructive loss?
Ans: Particular average loss: Particular average loss is defined as ‘a partial loss’ of the subject – matter insured caused by a peril insured and is not a general average loss. The general loss or expense is voluntarily done for the common safety of all the parties insured. But the particular average loss is fortuitous or accidental. It can not be partially shifted to others but will be borne by the person directly affected.
Constructive loss: Where the subject – matter is not actually lost in the above manner, but is reasonably abandoned when its actual total loss is unavoidable or when it can not be preserved from total loss without involving expenditure which would exceed the value of the subject – matter.


@#. Difference between Total loss and Partial loss.
Total loss Partial loss
1. Losses are deemed to be total or complete when the subject matter is fully destroyed or lost or ceases to be thing of its kind. 1. Partial loss is there where only part of the property insured is lost or destroyed or damaged.
2. Total loss generally two types: Actual total loss and Constructive total loss. 2.Partial loss generally four types: Particular average losses, General average losses, Special Charges, Salvage charges