There are numerous companies that provide different kinds of insurance covers to millions of people. most insurance companies get themselves insured like their clients and the company that provides insurance to an insurance provider is called a reinsurance company.
Now, one might wonder, why an insurance company would face the need of being insured by a reinsurance company. There can be numerous answers to this query, but to put it in a simple way, one needs to remember that an insurance company is also just another type of organization that can face any number of threats like any other organization.
So, to keep themselves protected from such threats like paying up for multiple claims simultaneously that might even lead the company to become bankrupt, or pay for the damages due to natural disasters or terrorist attacks etc., insurance providers seek the assistance of reinsurance companies. Understanding the fact that, insurance companies are also liable to loss and damage will help in understanding the importance of the protective cover provided by reinsurance companies.
Reinsurance companies generally offer two kinds of policies, which are treaty reinsurance and facultative reinsurance. In treaty reinsurance the reinsurance company takes partial or even full responsibility of the client company subject to the terms and conditions of the insurance policy. In this policy, the client company is obliged to surrender the business to Reinsurance Company.
In facultative reinsurance, a specific risk fundamental to the individual contract, is taken into consideration. In this policy, the terms and conditions are negotiated first after which the entire or a single part of the policy is reinsured. This type of reinsurance brings down the client company’s exposure to risk through a single policy.