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Simplifying Life Insurance in India
Difference Between Insurance and Reinsurance Explained
Both insurance and reinsurance policies are critical risk management tools that provide significant coverage to individuals and companies against insured products. Though in both cases, the policyholder must pay premiums, their primary difference lies in their applicability.
This article will discuss the difference between insurance and reinsurance and try to understand which will be better for hedging substantial financial losses.
What Is Insurance?
Insurance involves a contract duly signed by a person or firm to hedge against financial loss ushered by an unforeseen event. For instance, you may buy life insurance to safeguard your family’s future in case of an untimely death. Similar to life insurance, there are other insurance policies, like health insurance, car insurance, etc., all of which fall under the general insurance category.
These are a few general insurance policies:
1. Health Insurance
You can buy health insurance plans for yourself or to safeguard each family member. The insurer promises to pay for the medical expenses arising out of illness, abrupt injury, etc., as long as you pay the defined premiums.
Moreover, apart from medicinal costs, insured individuals are eligible to receive aid against hospital bills and doctor consultancy charges as and when applicable.
2. Home Insurance
Buying a home insurance plan is a great option to insure your home against structural damages and secure coverage to counter financial loss that can be inflicted by robbery. The insurer guarantees to compensate for the damages if the registered address undergoes any of the STFI perils. By STFI, we refer to building damages caused by flood, storm, inundation, or even bursting of water pipes.3. Motor Insurance
Active comprehensive motor insurance bears the incidental damage costs of your vehicle and that of the other involved party for a period during which you pay premiums. It is recommended to buy one comprehensive policy as driving on Indian roads is full of risk and uncertainty.
However, per the Motor Vehicles Act, one must buy third-party vehicle insurance mandatorily to ensure that the insurer can furnish compensation immediately if they inflict damage on someone else.
What Is Reinsurance?
Reinsurance plans are designed to manage the probable risks of insurance companies. Reinsurers are separate companies with traditional insurance providers as clientele, whose business models are susceptible to high risk and may even bring a situation of bankruptcy.
Some common forms of reinsurance include the following:
1. Reinsurance Treaty
Insurance providers sign treaty insurance policies to safeguard their mutual goals. When direct writers approach the reinsurance providers, they can select the ceding companies. Accordingly, the insurance companies tie up business relationships with preferable insurers evaluating their personal risk appetite.2. Facultative Coverage
As per potential risks in a business, a primary insurance company can purchase facultative reinsurance and later share the premiums with companies offering the same protective tools. Here, the reinsurer can allocate the coverage among multiple companies. Though the ceding company decides the value of insured risks, the reinsurer is also actively involved in the decision-making process.
As we have developed an underlying concept of these protective tools, it will be easier to understand the difference between reinsurance and insurance.
Difference Between Insurance and Reinsurance
Except for the cost of insurance or reinsurance, there are other significant differences which have been listed below:
|
Parameter |
Insurance |
Reinsurance |
|
Product Concept |
It is a legal agreement where the insurer agrees to provide coverage for a fixed period against loss of life or financial loss. The beneficiary can be an individual or institution that is paying the premiums either monthly, quarterly, half-yearly or annually. |
Reinsurance is a form of insurance that acts as a protective shield for prominent insurance companies. Whether or not to avail of reinsurance is the call of an insurer. By signing reinsurance contracts, the insurers can share risks. |
|
Premium |
An insurance agency charges premiums to guarantee desired coverage to individuals, family members and even business partners against losing valuable things or life. |
Premiums are furnished by partner insurance companies. Each insurer’s contribution must be in accordance with the predetermined ratio decided by both the reinsurer and the ceding company. |
|
Coverage |
Coverage can be availed against financial loss or loss of life. |
A reinsurer offers coverage to insurance companies against a list of potential risks. |
Frequently Asked Questions
How are insurance and reinsurance policies similar?
The insurance and reinsurance schemes are meant to recover the financial setback arising from the loss or damage of the insured item. In both cases, the contractually bound guarantor is liable to pay for the unforeseen expenses. It happens as the policy seeker pays them premiums to avail of the facilities.
Moreover, deductibles exist for both, implying that the policy-issuing party needs to pay up to a predefined sum before applying for indemnification.
Why do insurers sign reinsurance treaties?
What is the future of reinsurance?
What questions should you ask yourself before buying insurance?
Other Important Articles Related to Reinsurance
Important Guides Related to Life Insurance
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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