Often people do not understand reinsurance in insurance, even though the person already has an insurance product. When you study insurance more deeply, you will begin to recognize reinsurance. How to understand reinsurance in insurance? Reinsurance does not directly connect insurance to the client. Therefore, you will be able to understand reinsurance in insurance when studying a little deeper.
Reinsurance companies do not have direct relations with customers. This is one reason customers suffer from difficulties in understanding reinsurance in insurance. Reinsurance companies only have a working relationship with insurance companies.
Insurance companies use reinsurance when they want to protect themselves against high insurance risks. They protect themselves by utilizing services from other insurance companies. This is the main reason that causes insurance companies to do reinsurance. They want to share the risk with other parties while still getting the excess premium value.
Understanding Reinsurance in Insurance: Hedging Actions.
The insurance company will assess the value of the premium and the value that the company can bear. If the insurance company assesses that insurance a premium is greater than the value that can be borne, then he can divide the risk he faces. The insurance companies will insure a portion of that value with the reinsurance company. This concept is indeed similar to companies in the financial industry that carry out hedging.
With you understanding reinsurance in insurance that is identical to hedging action, it certainly further clarifies the position of reinsurance. But there are other functions that emerge from understanding reinsurance in insurance. Insurance companies can protect the stability of their income levels.
By doing this reinsurance, insurance companies basically have to protect the level of income stability.
This is because by running reinsurance, companies have protected against potential large losses.
Insurance companies also have other considerations in relation to reinsurance. Insurance companies still benefit from reinsuring reinsurance companies. These insurance companies benefit as intermediaries. Why can they run this mechanism? This is because insurance companies see the difference in the premiums they receive and how much they have to pay premiums. Insurance companies reinsure reinsurance companies with premiums lower than the premium they receive from their customers.
Understanding Reinsurance in Insurance: Type of Reinsurance
Actually, reinsurance has two types of reinsurance, namely proportional and non-proportional reinsurance. If the reinsurance company takes the risk of the claim proportionally based on the claim, then it is proportional reinsurance.
Besides being proportional, reinsurance companies can also have non-proportional types. For non-proportional reinsurance types, usually, reinsurance companies will bear claims above the maximum limit that can be borne by the insurance company.