Which of the following can be regarded as reinsurance ?

The correct answer is - A Ltd. has undertaken a risk. The same risk is later undertaken by B Ltd. from A Ltd.

Key Points

• Definition of Reinsurance:
  • Reinsurance occurs when an insurance company (the cedent) transfers part or all of the risks it has assumed to another insurance company (the reinsurer).
  • This is often done to reduce the financial burden of large claims and to maintain the insurer’s financial stability.
• Key Characteristics of Reinsurance:
  • Involves two insurance companies: the ceding insurer and the reinsurer.
  • The original policyholder is not involved in the reinsurance agreement.
  • Reinsurance helps insurers manage exposure to large risks and ensures solvency.
• Why Option 2 is Correct:
  • In Option 2, A Ltd. (the cedent) undertakes a risk and later transfers the same risk to B Ltd. (the reinsurer).
  • This matches the definition and characteristics of reinsurance, where the original insurer seeks to share or transfer its risk to another insurer.

Additional Information

• Types of Reinsurance:
  • Proportional Reinsurance: The reinsurer receives a proportion of premiums and pays the same proportion of claims.
  • Non-Proportional Reinsurance: The reinsurer covers losses above a certain threshold, with the cedent covering losses below that threshold.
• Importance of Reinsurance:
  • Helps insurers manage risks associated with large claims, such as catastrophic events.
  • Increases an insurer’s capacity to underwrite larger or more complex policies.
  • Provides financial stability and ensures compliance with regulatory requirements.
• Incorrect Options Explained:
  • Option 1: Collaboration between A Ltd. and B Ltd. indicates shared underwriting, not reinsurance.
  • Option 3: Jointly undertaking a risk is co-insurance, not reinsurance.
  • Option 4: Cancelling a risk is unrelated to reinsurance.