In simple terms, insurance is the act of indemnifying the risk, caused to another person. Conversely, reinsurance is when the insurance company takes up insurance to guard itself against the risk of loss. The two concepts are very similar to each other but may differ in they way; they are applied.
Insurance is a very common form of financial protection which is used to provide protection against the risk of losses. On the other hand, reinsurance is used by the insurance company, when it does not want to bear the entire risk, and shares the risk with another insurer. In reinsurance the risk of loss is underwritten by another company. This article excerpt explains the fundamental differences between insurance and reinsurance.
Content: Insurance Vs Reinsurance
|Basis for Comparison||Insurance||Reinsurance|
|Meaning||Insurance alludes to a contract between two parties wherein one party promises to indemnify the other in case of loss or death.||Reinsurance means insurance taken up by an insurance company when it does not wish to bear entire risk of loss and thus shares it with some other insurer.|
|Protection||Provided to individual or things.||Taken by the large insurance companies to survive large losses.|
|Premium||Paid by an individual, is received by an insurance company.||Paid for reinsurance is divided among the insurance companies in specified ratio.|
Definition of Insurance
The term insurance is defined as a contract between two parties insurer and insured, whereby the insurer agrees to indemnify certain losses caused to the insured, for adequate consideration, i.e. premium. The party who look for obtaining insurance policy is called insured, whereas the party which assures the other to mitigate the risk is called insurer.
The agreement in which terms and conditions relating to insurance are specified is known as an insurance policy. It contains the details of losses covered by the policy and maximum amount to be paid in the event of death/loss.
There are two types of insurance, i.e. life insurance and general insurance:
- Life Insurance: The insurance which covers life risk of the insured, is life insurance or assurance. In the event of death, the amount is paid to the nominee.
- General Insurance: Any insurance other than the one which covers the risk of life is called general insurance. It includes fire, marine, and other insurances.
Definition of Reinsurance
Reinsurance is used to mean an insurance contract between the ceding company and the reinsurer, whereby the two parties agrees to transfer and accept respectively, a definite proportion of risk or liability, as defined in the agreement.
The original insurance company which agreed to indemnify the risk and also to ‘cede’ or transfer the risk/liability to another insurance company is called ceding company. Moreover, the other insurance company is the reinsurer.
In general insurance, some risks are so high, that it is not possible for one insurance company to bear alone. In such a case the company insures the complete risk itself and pass on a specified portion of the risk to another insurance company and retains only that amount of risk, which it can bear. The premium received from the insured is shared by both the companies, in the agreed ratio. There are two types of reinsurance, given as follows:
- Facultative Reinsurance: A type of reinsurance contract, that covers the loss of a specific risk, which is expressed in the agreement.
- Treaty Reinsurance: In this contract, the two companies, i.e. the ceding company and the reinsurer enters into a treaty agreement, and the reinsurance is under the confines of the treaty. The limits may be related to money, business, geography, etc.
Key Differences Between Insurance and Reinsurance
The points given below are noteworthy, so far as the difference between insurance and reinsurance is concerned:
- A contract between the insurer and insured wherein the former assures to indemnify the latter in the case of loss or death is known as insurance. Reinsurance refers to the insurance taken up by an insurance company to mitigate heavy losses when it does not wish to bear the entire risk of loss and thus shares it with some other insurer.
- In insurance, the protection is either provided to an individual or things. On the other hand, in the case of reinsurance, the protection is taken by the large insurance companies to survive huge losses.
- In the case of insurance, the premium paid by the individual is received by the insurance company only. As against this, in the case of reinsurance the premium paid by the insured, is shared by the insurance companies in a specified ratio.
Insurance and reinsurance contracts actually help the insured, to recover losses. With the help of reinsurance, the insurance company is able to pool the policies and divide the risk, among various firms, that ultimately saves the original insurance company from heavy losses.