What is Reinsurance? How is Reinsurance controlled by IRDAI?

In carrying on its business as an insurer, a company assumes a risk of the proposer in regard to life or assets for the payment of premium. Such a risk will arise in the future, in life cases after a long period of time depending on the term of the policy and on non-lives after a little while during the contracted period of cover. The quantum of risks so assumed by an insurer has to be provided for. It may so happen that the quantum of risk so assumed by an insurer may exceed its capacity to bear. In each circumstances, the concept of re-insurance plays a leading role. Reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim. The party that diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer. The agreement or the arrangement for re-insurance is primarily between two insurance companies and the insured does not have any role to play in the arrangement. The insured cannot and does not have any recourse of claim against the re-insurer and as far as the insured is concerned, the liability to discharge any claims under the policy stays wholly and clearly is with the insurer. The quantum of re-insurance depends on the volume of business underwritten by the primary insurer and also the quality of risks underwritten. In cases, where costly assets are under-written or where the sum assured is beyond the capacity of the insurer to bear, the part or whole of the risk is passed on to one or more re-insurers for the payment of a premium. Where a claim under the policy arises, the insurer will discharge the liability under the policy to the insured and claim contribution from the re-insurer(s). The assessment of re-insurance pass over is determined by a combination of factor like the financial strength of the insurer, the seriousness of risk, the quantum of the cover etc. The choice of the re-insurance is left to the insurer but IRDAI has the regulatory function in that. The re-insurance programme of an insurer must be submitted to the IRDAI and its clearance obtained before the start of the year. In granting the approval, the IRDAI will go by the character of risks, the type of re-insurance cover contemplated, the portion of the risk that is planned to be passed on, the payment record of the re-insurer and about the availability of re-insurance policies in the Indian market. Care will be taken to see that an insurer does not pass the entire risk, without retaining any part of it, to the re-insurer making a mere conduit in the process's. This will mean that the Indian insurer is only a front and the device adopted by it will mean the presence of a foreign party in the Indian market. There are two types by of re-insurance arrangement prevalent in the market. Facultative and treaty re-insurance programmes. In the case of the former, an arrangement is entered into between the insurers for every policy that is insured. It is purchased by the leading companies for individual risks for amount in excess of their limits. A treaty re-insurance means that a leading company and the re-insurer negotiate and execute a contract under which the re-insurer cover a specific share of all the insurance policies issued by the insurer under a particular line of business. In India, a practice used to exist that all companies wanting to have re-insurance contracts must offer a fixed percentage of the risks to the General Insurance Corporation of India-designated as a national re-insurer. This was meant to save valuable foreign exchange which otherwise uses to the spent on payment of re-insurance premium to the foreign re-insurer and brokers. With the establishment of branches of foreign re-insurers in India after 2015, this feature has been slowly given up. Large risk like Air India, ONGC, Gail, Reliance etc. still continue to be covered by proper re-insurance agreements retaining parts of the risk by the insurer, other Indian companies, GIC etc. The re-insurance market in India is developing on professional lines.