Reinsurance:- If Insurance Company does not wish to bear the whole of the risk of a policy, then it will reinsurance a part of the risk with some other insurer. In such a case the insurer is said to have ceded a part of its business to another insurer .i.e. the risk of the insurance is being underwritten by another Insurance Company.
Re-Insurance
In general insurance, there are risks which, because of their magnitude or nature, one insurance company cannot afford to cover, e.g. aviation insurance. Generally, In such cases, an insurance company insures the whole risk itself and lays off the amount it has accepted to other insurance of reinsurance companies, retaining only that much risks which It can absorb
A reinsurance transaction may thus be defined as an agreement between a ceding company and a re-insurer’ whereby the former agrees to cede’ and the latter agrees to accept a certain specified share of risk or liability upon terms as set out in the agreement.
A ceding company’ is the original insurance company which has accepted the risk and has agreed to ‘cede’ or pass on that risk to another insurance company or a reinsurance company. It may, however, be emphasized that the original insured does not acquire any right under a reinsurance contract. In the event of loss, therefore, the insured’s claim for the full amount is against the original insurer.
In other words, if an insurer is not willing to bear the whole of the risk, it reinsures itself Some risk retains with some other insurer. This is called as reinsurance. Both re-insurer and original insurer share the premium and risk in the same proportion end decided by them earlier.
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