Double Insurance and Reinsurance

• Preface
• Double Insurance
• Features of Double Insurance
• Working of Double Insurance
• Reinsurance
• Features of Reinsurance
• Terminology used in reinsurance
• Advantages of Reinsurance
• Methods / Methods of Reinsurance
• Difference between double insurance and reinsurance
• Effects of reinsurance
• Reinsurance and coinsurance,

The statement “Insurance is a medium of investment as well as protection” raises a question in the mind of the insured (insured) whether profit can be earned by insuring the same subject matter more than once? Also, “Acceptance of risk proposal depends on the willingness of the insurance company” This statement creates a doubt in the mind of the insured that if the proposal with high risk is rejected by the insurance company then how will the insured get protection against such risks? Can these highly risky propositions not be insured? We can get answers to all these questions from the study of this chapter on “Double Insurance and Reinsurance”.

When an insured buys more than one insurance policy from more than one insurer on the same subject matter, it is called double insurance. In this type of insurance, the amount to be insured can be different and more or less. At the same time, it can be more than the actual value of the insured object. In double insurance, there is no restriction on the amount of insurance. Its amount can be much more than the value of the subject matter of insurance.

Double insurance It is possible in all types of insurance whether it is life insurance or fire insurance or marine insurance, a person can buy any number of insurance policies on his life.On death or completion of certain term, the sum assured from all the insurance policies will be given to him or his nominee. But in case of indemnity contracts i.e. in fire and marine insurance contracts, in case of getting more than one insurance on the same subject matter i.e. in case of double insurance, the amount of all the insurance papers is not available to the insured, only the actual loss can be recovered. Therefore, the benefit of double insurance is more in life insurance. This is because the principle of initial contribution and indemnity does not apply in life insurance.

1. In this the same subject matter or life can be insured by more than one insurance companies.
2. In this, all the insurance policies are related to the same insured.
3. In this, the risk on all the insurance papers is of the same type.
4. In this, the risk is applicable to all the insurance papers in the same period.
5. There is an equal interest of the insured in the subject matter insured.
6. In life insurance, the insured or his nominee receives the entire amount of all the policies, whereas in the indemnity insurance contracts, only the amount of the actual loss is received.

Life Insurance – Any person can buy as many insurance papers on his life as he wants. On the completion of the insurance period or on the death of the insured, he or his heir respectively will receive the amounts of all the insurance policies. For example, Naveen Kumar bought two insurance policies of one lakh and three lakh from Life Insurance Corporation, whose term was 20 years. If Naveen Kumar dies after 15 years of purchasing the life insurance policy, then his nominee will get a total amount of four lakhs. In life insurance, both the principles of indemnity and contribution are not applicable, therefore the insured is entitled to receive the full payment of the amount for which the insurance policy has been purchased.

Indemnity Insurance – The principles of indemnity and contribution are fully applicable in both fire and marine insurance. That’s why we can get the same subject matter insured from different insurance companies, but in case of damage, the same amount will be received from all the companies as per the actual damage. The insured has the facility to get the amount from all those insurers as per the principle of contribution or from any one company. Later, the paying company will get the amount of damage in proportion to the amount of insurance from the remaining insurance companies.

Many times such insurance proposals come in front of insurance companies in which there is a lot of risk, it is beyond the power of an insurance company to insure such a huge amount. In such a situation, the rejection of the insurance proposal adversely affects the creditworthiness of the insurer. That’s why the insurer resorts to “reinsurance”.

Reinsurance is an arrangement by which an original insurer, which has insured a risk, gets a part of the same risk re-insured by another insurer. So that his liability is reduced, that is, in this, the insured property is re-insured by two or more insurance companies for the same risk.

• Meaning of Reinsurance – When an insurer insures a subject matter more than his capacity, then in such a situation he wants to reduce his risk. In such a case the insurer adopts the process of reinsurance of that subject matter. Reinsurance is a method of reducing risk. In this, an insurer transfers a part of his risk to another insurer by getting it insured. The re insurer is called the “Re insurer” and the re insured is called the “Principal Insurer”.
• Definitions –
  • Federation of Insurance Institute, Bombay: – “Reinsurance is the arrangement by which an insurer who has accepted insurance, transfers a part of the risk to another insurer so that his liability on any one risk is limited to his financial capacity.” Stay in proportion.”
  • Regal and Miller: – “Reinsurance is transfer of a part of its risk by an insurance company to another company.”
  • Pro. R. S. According to Sharma: – “When an insurer transfers a part of the risk in relation to the insured by getting insurance from another insurer, it is called reinsurance.
• Explanation by example – Naveen Kumar wants to get his residential part insured for Rs. 2 crores in order to get protection against possible loss or damage in case of fire. So he approaches “A” insurance company for the purpose of obtaining a fire insurance certificate. But “A” insurance company has financial capacity to insure only up to Rs.1 crore. In such a situation the company has two options. First, the company should reject Naveen Kumar’s proposal. Second, as an alternative, the company should accept this proposal and bear more risk than more economic capacity. In case the company accepts the second option, it would prefer to transfer the additional risk to another insurance company for the purpose of mitigating the risk. As a result: Insurance company “A” will insure Rs.2 crore and get insurance of Rs.1 crore from another insurance company. Getting this insurance of Rs 1 crore from another insurance company is called “reinsurance”.

1. It is an insurance between two insurers.
2. It comes under the category of indemnity insurance contracts.
3. Reinsurance is applicable to all types of insurance.
4. Reinsurance does not affect the rights of the insured.
5. The relationship of the insured with the ‘original insurer’ remains the same.
6. An insurer cannot reinsure more than the sum insured.
7. An insurer transfers the risk in excess of his capacity to another insurer.

It is also important to understand the meaning of the following terms used in reinsurance –

1. Ceding Office – Original Insurer.
2. Cessation – This is the amount that is handed over by the insurer to the reinsurer.
3. Retro cession – A second reinsurance ie where the reinsurer decides to insure against a part of the risk.
4. Line – A word that is synonymous with retention.
5. Guarantee – An alternative term often used in reinsurance to fire insurance.
6. Commission – It is defined to mean “percentage of premium concerned” but in reinsurance contracts, the amount paid by the re insurer to the insurer is more than in direct trade, as all factors have been considered for underwriting.

1. Advantage of the Insurer – According to Dinsdale “Where the amount of one or more risks of a single peril is so great as to be beyond the limits of an insurer to bear, reinsurance becomes necessary.” Reinsurance gives the following benefits to the insurer – Original insurer gets protection He feels more secure by sharing his risk with others. By reinsurance many insurers resell the risks they insure. and lump together a large number of risks. What is the uncertainty of the risks in this? The capacity of the insurer to insure increases. Many small companies can also easily insure big risks. Heavy risks like earthquake, flood, storm etc. can be mitigated by insuring future risks through reinsurance. In case of bankruptcy of an insurer, an alternative to his business can be found by getting the remaining insurance business re-insured. Uneconomic competition among insurers can also be prevented by this. Reinsurance increases the profits of the company. For new insurers who have low risk appetite, reinsurance can prove to be a boon for them.

2. Benefits to the Insured – Although there is no direct relationship between the insured and the reinsurer in the case of reinsurance because it is a mutual agreement between the insurers, yet the insured gets the following benefits from this arrangement – The insured becomes more secure. He gets the confidence of two insurers on the same policy. One can get compensation on account of reinsurance even if the insurer is insolvent. The insured does not have to go round many insurers to get insured against a big risk. Insuring heavy and devastating risks becomes easy. The insurer greedily insures more risk which does not affect the insured.

Three main methods of reinsurance are prevalent –

1. Optional Method – In voluntary reinsurance each insurer and reinsurer are independent parties. Whenever an insurer insures more than his capacity, he sends a proposal to the reinsurer. Along with this proposal, he also sends a copy of the insurance policy to the reinsurer. The reinsurer accepts the proposal for reinsurance after considering various factors like nature of risk, probability of loss, position of the proposing company, premium for insurance etc. Thus, as and when the need for reinsurance is felt by the insurer, he proposes. The reinsurer decides to reinsure or not to reinsure only after analyzing the merits and demerits of each proposal. The reinsurance contract is entered into only if the reinsurer wishes, otherwise not, that is why it is called voluntary insurance.
   • Advantages –
     • There is no binding on the reinsurer.
     • This method is also useful where the risk is not quantified.
     • This method keeps the original insurer alert. If someone is going to deny Punma, he can also deny.
   • Defect –
     • This method is uncertain.
     • This method is expensive.
     • It has to do a lot of paper work.
     • Consent has to be sought repeatedly from the reinsurer, hence unnecessary delay.
     • This method is impractical and unprofitable for small and medium reinsurers.
     • Risk imbalances may arise for a voluntary reinsurer because of the limited number of risks it will take.
   • Utility – Voluntary reinsurance has grown in importance since the 1980s. The importance of reinsurance has increased in the field of engineering insurance, air traffic insurance, spacecraft insurance, crop insurance, nuisance insurance etc.
2. Automatic or Treaty Reinsurance – Under this method, there is an agreement between the original insurer and the reinsurer that the amount of insurance in excess of a specified limit will be presented by the insurer for reinsurance and will be accepted by the reinsurer company. Such a treaty is formally and legally binding on both the parties. The terms and conditions of reinsurance are the same as in the original insurance contract. The reinsurer cannot refuse to reinsure. Types of Treaty Reinsurance –
   • Quota Treaty – Under this agreement, it is arranged that a certain percentage of a certain type of insurance or risk will be reinsured. For example, an agreement is made that 50 percent of the business of fire insurance will be re-insured, then this will be called a fixed portion or a partial agreement. In this the reinsurer is also liable to pay both in the same proportion in which the premium is received. This method is very beneficial for new and small insurers because they can pass on a large part of their risk to the reinsurers. This method is still applicable. While it is difficult to classify the risks of insurance as to which risks are to be reinsured and which are not. From the point of view of the insurers, all the normal heavy and light risks are reinsured together, due to this the light or normal risks which the insurer could have earned some profit by taking it, also have to be reinsured according to the treaty, as a result, his profits decrease.
   • Surplus Treaty – In this agreement, it is decided that after insuring more than a certain amount by the insurer of different classes of risks, the whole or a certain amount will be reinsured. In other words, in this, the insurer enters into an agreement to re-insure the problem or insurance business of a certain amount after its capability. This settlement is done on the basis of each risk category.
   • Excess of Loss Treaty – This method arranges against the three catastrophes. Here reinsurance is not based on the sum insured but on the cost of individual claims. In this treaty, the amount of maximum liability under reinsurance is also determined. For example, X insurance company gets reinsurance from Y insurance company for losses above Rs.5 lakhs. The maximum loss limit is kept at Rs 10 lakh. If X company has to pay losses of Rs.12 lakhs then Y company will have to pay Rs.5 lakhs under this treaty. Company X will have to bear the remaining loss of Rs.7 lakh.
   • Excess of Loss Ratio or Stop Loss Treaty – Total losses are limited in this treaty. In other words losses above a certain limit are capped.
     • Example – Reinsurer pays 90 per cent of any gross loss ratio in excess of 75 per cent. On this basis a model can be forward type. – Annual premium income – Rs 50,00,000 Claims in the year – Rs 40,00,000 ., The gross claim ratio is 80 per cent and hence reinsurance is implicit. The amount in question is 75 per cent (Rs 37,50,000) ie Rs 2,50,000 (5 per cent of Rs 50 lakh). 90% of this is given by the reinsurer thus the insurer will “recover” Rs 2,25,000 from the reinsurer. This method protects the insurer from incurring very heavy losses over a year’s operations, though it cannot prevent the loss. To provide such protection The reinsurer is given an agreed percentage of the annual premium income.
     • Advantages of Treaty Method: The following are the advantages of treaty method –
       • It has a system of automatic reinsurance.
       • Simple method of reinsurance.
       • Reinsurance is done economically.
       • There is a balance of risks in this.
       • This method keeps the insurer assured.
       • Minimum paper work is required in this.
       • It is easy for new and middle class insurers to establish business.
     • Treaty method Defects of – This method has less defects. Some of the major defects are as follows –
       • In this the reinsurer does not get the opportunity to choose the risk.
       • The insurer has to reinsure the general risks as well, hence he incurs loss. Method of reinsurance of general risks This is very useful for me. But the use of this method for reinsurance of destructive accidents like earthquake, riots, riots, flood, storm etc. is very limited.
3. Pooling Method – In this method some or all the insurers form an organization of their own. Member insurers contribute their entire business to this pool and losses are also paid from this pool. The profits of the pool are then shared among the member insurers in this fixed ratio. It is used exceptionally for heavy risks such as nuclear power risks. In addition to the above there is another method of reinsurance called Shopping or ‘Street’ Reinsurance. There is no permanent agreement regarding the reinsurance of the risk of a company. Each policy is treated on a separate basis. Reinsurance is sought only when there is a need for reinsurance of a policy. The reinsurer examines each case on its merits and may accept or decline the risk on any terms and conditions. The original insurer is not sure about the availability of reinsurance, so he exercises great care in choosing the risk.

1. The original insurer can sell a single policy of any amount and transfer the excess limit to the reinsurer.
2. Reinsurance contract makes it possible to buy only one policy from one insurer.

The reinsurance contract is only between the re insurer and the insurer. The amount given by the re insurer is paid to the insurer. Co-insurance is where more than one insurer is in contractual relationship with the insured for sharing of the same risk. It is often found in fire insurance. Example Four insurers each arrange to bear 25 per cent of the risk.