As an insurance subscriber, you may know what insurance is all about. Buying insurance policies requires careful choosing between several factors. You must think about premium payouts on a periodic basis. You must understand what the policy covers and how you must pursue your claim requests so that you get your policy reimbursement cheques or demand drafts cleared up in a hassle-free manner.
Now, what is Reinsurance? Are insurance and reinsurance used synonymously?
On this parlance, let us understand what insurance is and what reinsurance is and also cover the core points of differences covering insurance vs reinsurance. Helping you get started here:
What is Insurance- Meaning and Conceptualization Explained
Insurance is a calamity-protecting product that is used as a risk mitigation tool for independent retail investors, business entities as well as start-up SMEs.
You may have quite a lot of unforeseen circumstances that you might least be prepared for. It could be a sudden demise inside the family. Or, your loved one could suffer from a critical illness requiring immediate hospitalization.
When you are an office owner or a commercial entrepreneur, you might face a fire outbreak that leads to damage to goods placed inside your inventory or godown premises. Similarly, your office furniture might get impacted due to excessive floods inside your city. Likewise, you might come across several unforeseen circumstances or an unprecedented set of events you might least be prepared for.
Here is why individual investors as well as business entities take up relevant forms of insurance policies to get each of your contingencies covered in a comprehensive manner indeed.
You must approach an insurance company to choose the policy you want to take up for your personal or business needs. The service provider is also known as the insurer here. You become the primary policyholder or you are deemed as the insured here.
Hence, a policy agreement gets drafted out in the name of your account or KYC credentials. The policy is now under your name. In lieu of the same, you remit premium amounts for the policy amount.
In the event of the policy event, you make a claim request with the insurer firm. And, the insurer protects the insured with the corresponding amount of money that is taken as a coverage sum.
What Is Reinsurance- Meaning and Conceptualization explained
Reinsurance entails the concept of an insurance service provider, otherwise known as the insurer transferring a part of its risk to another insurance company. This is being done to avoid losses happening to one insurance company due to a huge amount of claim requests or to avoid losses from administration expenses or overhead expenses that overrun the number of premium subscriptions the insurance firm collects from its members per se.
Here, this is a risk-managing technique that is adopted by one insurance company wherein the level of risk from one firm is transferred to the other insurance firm as such.
Sometimes, an amalgamation or a takeover of one loss-producing unit can also be taken over by a profit-earning reinsurer to balance the ends or satisfy the ever-growing demands of insurance consumers on the whole.
Insurance Vs Reinsurance- Key Differences Covered
Now that we are done covering the concepts between primary insurance and reinsurance, you might have an overall clue as to how each mechanism works here.
On this parlance, let us have a run-down on pointers that cover key points of differences covering Insurance Vs Reinsurance. Helping you through a run-down on pointers connected with the same:
Definition between Insurance and Reinsurance
Insurance is an exchange of contracts between the insurer and the insured. This is done to mitigate financial risks for business entities as well as retail investors for exchange of premiums.
Whereas, with respect to reinsurance, this is the transfer of risk from one insurer to another insurer to help service providers with risk management with respect to their losses arising from claim amounts or administration expenses.
Who are the participants that are involved?
The participants who are involved here include the insurance service provider and the primary policyholder. A primary policyholder takes a life insurance policy, term insurance, medical insurance, home refurbishments, or any other type of contingent policy with an insurance service provider.
Whereas, in the case of reinsurance, the participation is between one insurance provider with another insurance provider. Here, a loss-making insurer takes help from a profit-earning insurer to cover the former’s losses with respect to satisfying policyholders’ claim reimbursements or helping them with their overall administration expenses.
Unveiling the purpose between the two
With respect to the insurance domain, you look at it as a risk-managing proposition to help individuals, as well as businesses, support them through their unexpected series of emergencies or contingencies arising due to health, property, or other liability-related damages.
Whereas, with respect to reinsurance, a private equity firm or profit-earning financial conglomerates undertake the ownership of loss-making insurance units as a powerful risk mitigation technique. This is to help a loss-making brand survive through expensive claim reimbursements or help a firm sail through its administration-related expenses.
Understanding risk management between the two
In the insurance sector, the insurer assumes the complete liability or the contingent requirements that a policyholder assumes over property losses, health hiccups or other types of damages. Here, this is a risk-managing investment strategy.
Whereas, with respect to a reinsurance setup, the profit-earning conglomerate assumes a port of claims or damages from a loss-making entity to help the latter survive through the odds of running the business. In a crux, reinsurance is a risk mitigation strategy indeed.
Looking at the consumer base
With respect to the insurance industry, the consumer base comprises of business owners, retail investors, and individuals who want to protect themselves from personal and business contingencies.
Whereas, with respect to the reinsurance domain, the consumer base is loos-making insurers joining hands with investment bankers or successful insurance brands to help them offset losses they were otherwise suffering.
How are premiums paid out and who are the parties involved?
In an insurance domain, the premium amount is paid out by insurance subscribers or policyholders in lieu of policies that they take up to face contingencies or exigencies on their personal front as well as on the business front.
Whereas, with respect to the reinsurance domain, an insurance company pays to reinsurance companies. The premium reimbursements are shared by loss-making firms to private equity firms or wealth management institutions to get a revamp of their survival.
Types of coverage involved
In an insurance domain, the coverage or claims amount is processed in the favor of policyholders in lieu of policy types like health insurance, life insurance, car insurance, home maintenance, and business emergencies to name a few. These are different types of insurance policies you can look for.
Whereas, in the case of the reinsurance domain, the coverage is covered for a loss-making insurance provider by financial conglomerates, or other profit-making insurance companies to help loss-making companies survive their loss-making initiatives.
Regulation authorities involved
With respect to the insurance domain, it is mostly governmental agencies or local bodies that regulate the administrative setup of insurance service companies on the whole.
Whereas, with respect to reinsurance, the administration can be done by private centers or financial conglomerates that are run by funded agencies. Therefore, the authority or regulation norms are not strictly laid out by governmental authorities on the whole.
Examples covering both domains
In an insurance domain, an investor or a primary policyholder makes claim requests arising due to a fire outbreak, property damage, or illnesses arising to loved ones. You have health, auto, and property protection insurance policies in lieu of the same.
Whereas, in a reinsurance setup a private equity firm or a financial conglomerate purchases an insurance service provider in exchange for buyback shares the loss-making units make in lieu of the takeover firms.
Market base
In the insurance domain, you have a market base comprising retail investors, private retailers, individuals, and business entities comprising the primary market base.
Whereas, with respect to the reinsurance domain, the market base comprises financial conglomerates, private equity shareholders, and other insurance-affiliated agencies covering a larger segment of the market base protecting loss-making insurance companies.
Important guidelines you must follow while choosing the right type of policies with an insurance service provider
These are the important set of guidelines you must follow while choosing the right type of policy with an insurance service provider. Here are run-down on pointers connected with the same:
Learn the overview of what each policy covers
Before you foray into your first-hand journey with respect to choosing insurance policies vis-a-vis their insurance coverage norms, you must perform your homework or groundwork on the same.
You must have a detailed talk over a face-to-face interview with an insurance planner. Here, you can discuss about the different types of policies the market offers to insurance subscribers. You can discuss the features, pros, and cons of every insurance policy you would want to know more about.
This way, you would have an overall overview of what each policy covers and what benefits does it offers to you if you take up that particular insurance policy.
Read through policy guidelines beforehand
The operational mechanism behind how insurance works can be a tricky game for first-timers. Therefore, you can take a little more time to deep dwell into policy documents.
You can read online documents that give an overall overview into what are the terms and conditions that apply to different policy coverages. And, how you must apply for claim forms and in what time duration would you get your claims processed.
Knowing all of this beforehand helps you with well-informed purchase decisions to know if this is the right type of policy rider or policy benefit you would like to zero in on.
Looking for a comprehensive coverage
While you are on the lookout for a policy, you must know if the policy covers benefits for you and your family members.
For instance, when you pay huge sums of money as premium disbursements there is nothing wrong in checking if a policy covers a comprehensive medical coverage or accidental coverage for you and your family members on the whole.
Therefore, it is imperative for you to check on how comprehensive is the policy coverage for you and your family.
The Bottom Line
Insurance is a risk-managing strategy adopted by individuals, retailers, and investors to protect their emergencies or contingencies for their properties, illnesses, and business centers.
Whereas, reinsurance refers to a concept wherein a profitable insurance provider helps a loss-making venture come out of losses in exchange for buyback shares or premium dispensations the loss-making units pay to the financial conglomerates offering support and guidance to these units.
What are your thoughts on this? Do let us know in the comments below!
Frequently Asked Questions
How can you reduce the risk to the reinsurer?
Answer: The ceding insurer must read the terms of the treaty that is drafted between the reinsuring firm and the insurance service provider. Here, you must provide complete exposure to your existing capital vis-a-vis the added financial support you would require from a reinsurer.
Can you reduce catastrophic consequences between the insurer and the reinsurer?
Answer. The catastrophic or hurricane consequences of a takeover company that joins hands with a loss-making insurance provider can be avoided when the standard SOP is followed between both parties.
The loss-making unit must make a payment that is proportional to its existing income base. The summary of a third party portfolio or a predetermined working arrangement of yet another party must also be brought to notice between the participants.
In a nutshell, the expectations cannot exceed the performance as this is a loss-making unit trying to revamp itself to normalcy.
