Saturday, May 7, 2011

What Is Reinsurance?


Reinsurance is insurance that is purchased by an insurance company (insurer) from another insurance company (reinsurer) as a means of risk management, to transfer risk from the insurer to thereinsurer. The reinsurer and the insurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay the insurer's losses (in terms of excess of loss orproportional to loss). The reinsurer is paid a reinsurance premium by the insurer, and the insurer issues thousands of policies.
For example, assume an insurer sells one thousand policies, each with a $1 million policy limit. Theoretically, the insurer could lose $1 million on each policy  – totaling up to $1 billion. It may be better to pass some risk to a reinsurance company (reinsurer) as this will minimize the insurer's risk.

13 comments:

  1. finally somebody who can break the whole system down for me :) I so am gonna follow!

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  2. thanks for making it that understandable!

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  3. Just got done with an accounting class, hopefully this will help to further my knowledge! So far, it has!

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  4. Thanks, great info. Very interesting.

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  5. Yeah I really never understood how this works. Thanks for the post.

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  6. thanks for the links for more information.

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  7. nice definition and an example.

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  8. you're doing everyone a great favor with this blog.

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  9. Thanks for this info, it's helpfull for me.

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  10. Interesting post, learning new things everyday.

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  11. insurer came up to many times in there it confused me but i got the jist of it.

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