What is Reinsurance
It is understood that in insurance the fund of the policyholders is managed by insurance companies and the losses incurred by a few are shouldered by many. Therefore, more the number of risks, lesser the possibility of loss incidence. In other words, wider the geographical spread of the business, better the result. The same basic principle applies to reinsurance also. Reinsurance is effected by an insurance company to increase market capacity by spreading the risk over the international market. This is also effected to reduce any particular risk which the underwriters feel undesirable and must get rid of all or part of it. In order to do this, the insurance company takes the place of an insured and off loads its excess risks on another insurer. This is called reinsurance.