But still one area worries every one that is what will happen to Insurance companies if more people die or fall sick. How will Insurance Company honor the claims? So Policy holders should not be worried because Insurance companies insure their business under reinsurance. In this blog, we are covering this fear of policy holders by understanding concept of insurance.
Public take insurance to cover the risk of an uncertain event and feel safe. In the same way, insurers buy insurance of their business and feel safe. Their business is to pay claim if insured event occurs. This system of Insurers buying insurance is called Reinsurance. This protects Life, Health and General Insurance by reducing their exposure to a specific risk. For example, Life Insurers calculate the premium on standard mortality table expecting an average mortality claim however It is possible that claim exceeds budget then Insurance companies would have difficulty in paying claim.
So Insurers follow a system that all risks beyond a standard risks are insured under insurance. For example, in life insurance all death cover over Rs 50 lakhs may be covered under reinsurance. In health insurance all cases over Rs 10 lakh may be covered under insurance. Same way, general insurance cover all large cases under insurance. So insurance shares the claim as per an agreed formula if such claim happens and insurance company maintain their solvency.
What is Reinsurance?
Reinsurance means an insurance for insurance companies. Insurance companies cover the risks for individuals and businesses. Insurance covers the risk of excessive claims due to different reasons for insurance companies.
How many types of Reinsurance?
There are two types of reinsurance:
- Treaty Reinsurance
- Facultative Reinsurance
Hence concept of reinsurance must reassure Policy Holders that all claims will be paid even if an extra ordinary event happens. For example, Pandemic Covid 19 is causing extra cases of death and patients but such extra burden will be shared by reinsurers. These reinsurers are large international organization’s who are collecting premiums from across the world.
How Reinsurance Works?
For awareness, few terminologies of insurance are given below:
- Ceding Party: Insurer who are buying insurance or party who is sharing the loss.
- Treaty Reinsurance: insurance for a specific period. Cover all risk (written or not written) for a given period.
- Facultative Reinsurance: Reinsurance for specific cases as per given agreement i.e all cases beyond Rs 50 lakhs.
- Proportional Reinsurance: Here reinsurer agrees to insure risk by taking a proportion of premium collected.
- Non Proportional Reinsurance: Here insurer pays only if claim exceeds an agreed limit for example insurer will pay the claim till Rs 50 lakh and any thin beyond Rs 50 lakh will be paid by reinsurer.
All Insurance companies operate under the system of insurance which is regulated by IRDA. IRDA ensures business solvency by keeping a regular check on total cover provided and cover under reinsurance.
New demand will arise due to increased availability and shifting risks
Favoured by the current megatrends, reinsurers have the capacity and capability to further expand the scope of insurable risks and market penetration. This holds for mature markets where the insurance penetration is already pretty high, as well as for developing markets. Both the scope of insurability and the demand for certain covers will change, driven by the development of our economy. Products will be needed for previously uninsured events, e.g. epidemics or increasing weather-related risks or new threats such as cybercrime.
That’s why we focus on closing the insurance gap, for example by cooperating with public institutions to enable private insurance coverage in mature markets, and by offering solutions for governments in emerging markets. The digital transformation brings new risks such as cyber to the table. There is a huge potential for growth in such unsaturated markets: in cyber, only about 1% of losses are currently insured worldwide. Additionally, new technologies open up the market for basic insurance coverage to individuals in emerging economies.
Big data and analytics allow insurers to efficiently process underwriting and losses with low volumes and high demand rates. Thanks to innovative data technologies, insurance can also be offered that was previously considered unprofitable or difficult to assess. Innovations – like the blockchain technology – that support digital contracts, online payment or automated claims handling make it possible to increase the availability of insurance in developing markets and increase customer convenience in developed markets, both leading to higher penetration. That’s why we expect growth in all personal and SME business.