Process of Risk transferring in Insurance and Reinsurance
Insurance is the contract between an Individual/ Entity with the Insurance company to protect them against financial loss.
An Individual/ corporation pays a pre-defined payment to the insurance company to protect them against an uncertain event.
In this article, we covered the Process of Risk transferring in Insurance and Reinsurance.
In this image, you can see 3 parts.
The Insured Risk (different types of Insurance).
The Insurer
The Reinsurer
Different types of risks can affect the individual/ entity's financial freedom by unexpected financial losses.
Now, let's understand the process of transferring risk.
So, the Individual/ corporation pays a premium to the Insurance company and transfers the risk of an uncertain future event.
Insurance companies may also be affected by uncertain risks. To cover the claims of Individual/ corporation policies, Insurance companies invest the amount received as a premium in different secure/ high return portfolios.
Also, If the insurance company is more concerned about the occurrence of the high amount of claim then Insurer can again take the insurance and it's called Reinsurance.
By taking Reinsurance, the insurer transfers the part of the risk to the reinsurer by paying a pre-defined part of the premium.
Now, the reinsurer again invests the amount received as a premium at secure investment funds/ Capital markets.
If the reinsurer wants to secure itself from the potential huge losses, it can take the reinsurance by paying a part of the premium.
Above is the whole process of Transferring the risk between insurer and reinsurer.
Reinsurance is a vast topic to understand, we are trying our best to provide the knowledge via articles.
Written by: Kalpesh Agrawal (Actuarial Intern - IIB)
Do you have any questions related to Actuarial Science?
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