What is the Difference Between Insurance and Reinsurance?

Nov 23, 2022
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Insurance is one of the fastest-growing industries globally. Earlier, the concept of insurance was limited only to life insurance, but nowadays, through general insurance, you can buy insurance coverage for most things you own, such as your car, house, jewellery, electronic devices, bike, and many more. However, life insurance still remains the most popular type of insurance.

Reinsurance has emerged as a risk management tool for insurance providers to minimise their risk in the event of a major claim. Like insurance, reinsurance is also a form of financial protection used to minimise the risk of losses. The insurance allows you to transfer the risk to another party by paying an insurance premium. An insurance premium is paid as an incentive for bearing the risk of losses. While the terms Insurance and Reinsurance may sound similar, the difference lies in how they are used. This article elucidates both terms in detail and how they differ from one another.

Insurance is a common concept that describes the act of safeguarding against risk. An insured is a person or entity who seeks to obtain an insurance policy, while an insurer is the insurance provider that shares the risk for the premium paid.

What is Insurance?

An insurance policy is a contract between an individual/policyholder and an insurance company/insurance provider. Under this contract, the policyholder pays a regular sum of money as a premium to the insurance provider in return for financial protection against an unfortunate event as mentioned in the policy document. Such as the untimely demise of the life insured, an accident, damage to a house, accidental damage to a car, etc.

As per the terms and conditions of the insurance policy, the insurance company provides a lump sum amount to the policyholder or nominee in case of an eventuality. The policyholder chooses the required insurance coverage based on his/her needs and life goals. Since an insurance policy has several components, it is necessary to read the fine print thoroughly and understand all the nuances of it to make sure you choose the best-suited plan.

What is the Difference Between Insurance And Reinsurance?
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Here are a few common types of insurance policies:

1. Life Insurance:

Life insurance provides financial security to your family so that they continue living the same lifestyle without any compromises due to the financial instability caused due to the loss of a breadwinner. There are a plethora of life insurance plans available in India that can be purchased online or offline. You can choose from different types of life insurance plans considering your requirements. The most common type of life insurance plans are - term life insurance plans, whole life insurance plans, endowment life insurance plans, money-back life insurance plans, and pension plans.

2. Health Insurance:

Health insurance is a type of insurance that provides coverage against any medical emergencies arising out of injury, illness, or accident. It extends its coverage to medical expenses, such as hospital bills, medicines, consultation fees, etc. A health insurance policy can be bought for a specific period by paying a monthly or yearly premium, and the policy can be bought for an individual or family. The three major deciding factors of health insurance premiums are - the age of the insured, the sum insured, and health habits.

3. Motor Insurance:

As per Motor Vehicles Act 1988, third-party insurance coverage is mandatory to drive your vehicle on a public road. Driving without a valid motor insurance policy is considered a criminal offence, and your vehicle's registration will be temporarily cancelled until you buy a valid policy. Besides, it can lead to heavy penalties and imprisonment of the vehicle owner. Third-party insurance financially protects you against any third-party damage, loss of property, death, or physical injury caused by your vehicle. However, it does not cover the loss or damage caused to your own vehicle. Comprehensive motor insurance gives you all the benefits of third-party insurance as well as protection for you and your vehicle caused by an accident, theft, burglary, fire, explosion, transport, etc. Many vehicle owners buy only third-party motor insurance because it is considerably cheaper than comprehensive motor insurance. Ideally, it is advisable to buy a comprehensive motor insurance policy to secure your vehicle from unforeseen events to fulfil all your motor insurance needs.

4. Home Insurance:

Home insurance, also called home-owner/ house-holder insurance, is a means by which you can protect the structure of your home and also your precious belongings from perils such as fire, earthquakes, storms or floods (commonly referred to as STFI perils, i.e., Storm, Tempest, Flood or Inundation perils), bursting or overflowing of pipes, and other calamities. It also can cover your valuable personal property, such as electronics, jewellery, art and so on, from burglary/theft.

What is Reinsurance?

The insurance companies get financial protection from a reinsurer. These reinsurers are basically companies that handle the risks that are too large for the insurance companies to handle on their own. Hence, it is called the insurance of insurers.

Since insurance is a risky business, it is crucial that the insurance providers have their own protection in place to avoid bankruptcy. With the assistance of reinsurance, insurance companies can obtain business opportunities that would otherwise be impossible for them.

Through reinsurance, an insurance company can pool its insurance policies and divide the risk among a number of other insurance providers so that in the event of a huge loss, the risk is divided throughout the companies, thereby saving the one insurance company from huge losses.

Here are a few common types of reinsurance plans:

1. Facultative Coverage:

In facultative reinsurance, a primary insurer purchases a cover for a single risk or a block of risks held in the primary insurer's book of business. Since the coverage can be offered by multiple companies for different individual policies, the amount of risk transferred is decided not by the reinsurer but by the ceding company.

 

2. Reinsurance Treaty:

When insurance companies enter into a reinsurance contract with another insurance company it is called treaty insurance. The insurance agreement remains in place with the insurance company and the direct writer. The reinsurance companies offer proposals to the ceding companies mentioning the maximum risk they will be willing to take from the insurance company. So, the direct writers have the freedom to choose the best deal and enter into an agreement.

Insurance v/s Reinsurance:

As discussed, insurance and reinsurance; both provide financial protection to safeguard against the risk of losses. The term insurance is typically used when individuals and entities buy it to safeguard against risk. Whereas reinsurance is when an insurance provider guards themselves against the risk of loss arising due to a major claim. Change in the premium of reinsurance largely impacts the premium of insurance as with an increase in the premium of reinsurance, the cost of insurance companies also increases.

 

Warm Regards,
Ketki Jadhav
Content Writer



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