Reinsurance
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What is Reinsurance
Types of Reinsurance in the UAE
Facultative Reinsurance
This type of reinsurance covers specific individual risks or bundles of risks. It is primarily used to cover hazardous or high-value risks. Facultative reinsurance considers every policy on an individual basis. It makes it easy to tailor the policy to specific cases.
The reinsurer performs its own underwriting by analyzing all the aspects, just like the primary insurance company. It is called facultative reinsurance because the reinsurer has the faculty or the authority to accept or reject the whole or any part of the reinsurance policy offered by an insurance company.
Treaty Reinsurance
In treaty reinsurance, the ceding company and the reinsurer enter into an agreement/treaty under which the reinsurer covers a specified percentage of all the policies falling under the purview of the contract. Once the contract is signed, all the policies within its scope (both existing & new) shall be covered automatically till the contract remains in force. The contracts are generally long-term in nature.
Treaty reinsurance can be structured either on a proportional basis or a non-proportional basis, depending on how the losses are shared between the ceding company and the reinsurer.
In proportional reinsurance, a specific percentage of the original policies shall be reinsured. Under non-proportional reinsurance, the reinsurer’s liability is based on the aggregate claims of the ceding company.
Benefits of Reinsurance in the UAE
Reinsurance helps to mitigate the risks of individual insurance companies. A single insurance company assumes huge risks when it covers a large number of clients and their assets. Reinsurance transfers a part of this risk to another company.
This policy provides financial security and prevents insurance companies from incurring huge losses.
It offers protection against insolvency by ensuring that an insurance company honors all its claims without any default. This also gives a sense of confidence to the insurance companies to grow their business by acquiring more clients.
Reinsurance companies in the UAE share their expertise with the insurance companies and provide support & guidance. This is highly beneficial for new and fledgling companies.
It leads to stability in the premium rates charged by the insurance companies. Insurance premiums are typically based on the risk exposure of these companies. The lowering of risks results in stable premiums.
Reinsurance avoids the need to purchase multiple insurance policies for a business to cover larger risks. This leads to significant savings in time & cost.
This policy is insurance for insurance companies. It is a valuable investment that provides financial security for an insurance provider.
Importance of Reinsurance for Insurance Companies in the UAE
A reinsurance policy is a contract under which a ceding company transfers the whole or part of its risks to a reinsurance company. It is primarily done to cushion the financial impact of catastrophic events on a single company. So reinsurance is a robust risk management mechanism available to insurance companies.
Reinsurance protects insurance companies from severe financial losses and also safeguards their clients from unforeseen risks. The reduced risk exposure frees up capital and enables insurers to expand their business. The lower risks also help to maintain the premiums at affordable levels.
The ultimate objectives of reinsurance contracts are to diversify the risks, reduce earnings volatility, and protect the balance sheet of insurance companies.
Frequently Asked Questions on Reinsurance
Reinsurance has been defined as the insurance of insurance companies. The basic premise of reinsurance is to spread the risks and prevent individual insurance companies from having significant exposures to catastrophic events. They help insurance companies to transfer their risks, lower capital needs, and manage their claims effectively.
It is extremely risky for any single insurance company to take extensive exposures. So they transfer their liabilities to a reinsurer by purchasing a reinsurance policy. This transfer of risks makes it possible to provide coverage for massive disasters causing billions of dollars in losses. The premium paid by the original policyholder is shared by all the insurers involved in the transaction.
Facultative reinsurance typically covers high-value single risks or risk packages. But treaty reinsurance contracts cover all the risks assigned by an insurer over the contract period.
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Disclaimer: The reinsurance policy or plan may have limitations, exclusions, and other terms & conditions that may affect coverage. It is essential to carefully review the policy wording before making any decision.