Top 10 Advantages or Benefits of Reinsurance
The advantages of reinsurance can be summarized as follows:
1. Reinsurance boosts Insurance Business
The major advantage of reinsurance is that it assists in the boom of insurance business. It enables every insurer to accept insurance business as the total risk will be distributed among other reinsurers.
If there is no reinsurance, the insurer may not be willing to take up risks, particularly when the risk exceeds beyond his capacity to manage.
2. Reinsurance reduces the risks
The prime principle of insurance is to reduce risk. As the risks are spread across wider area, the loss of the individual is minimized which gives the insurer the secured feel. The revenue of insurance companies are stable due to reinsurance. It also helps the insurance companies to gain knowledge about various types of risks and the basis of rating the risks in the future.
3. Reinsurance Increases Goodwill of Insurer
Reinsurance helps to boost the overall confidence and goodwill of insurer. When the insurer develops confidence, he understands the nature of risks involved beyond his capacity.
So reinsurance increases goodwill of an insurer.
4. Reinsurance Limits the Liability
Reinsurance motivates the insurers to undertake and spread the risks. Hence the liability of insurer is limited to the maximum.
5. Reinsurance Stabilizes premium Rates
The premium rates of insurance are stabilized by reinsurance. Generally, the premium rates are calculated on the basis of the loss experienced by the insurer in the past, due to the risk concerned. Reinsurance takes into account of all these data and fixes the premium rate according for various types of risks under mutual agreement.
Thus reinsurance stabilizes the fluctuations in the premium rates of various types of risks.
6. Reinsurance Protects the Insurance Funds
The insurance funds of the insurer is well protected due to reinsurance. Additional security and peace of mind is an added advantage of reinsurance for the insurer and the company that offers the insurance.
7. Reinsurance Reduces Competition
The competitions between inter company is reduced as everyone work in a cooperative manner and with the helping tendency in the insurance business. Thus reinsurance helps to control competition and increase overall morale of the employees in the insurance business.
8. Reinsurance Reduces profit fluctuations
The reinsurance plans reduce, to a considerable extent the violent fluctuations in the profits of the company. If on the other hand, heavy risks are retained by the original insurer, his profits are greatly upset due to a heavy single loss.
9. Reinsurance Encourages new enterprises
It encourages the new underwriters, who in their early period of development, have limited retentive capacity. In the absence of reinsurance facility, the tremendous growth of new enterprises is doubtful.
10. Reinsurance Minimizes dealings
Due to the reinsurance scheme, the insurer is required to indulge in the minimum dealings with only one insurer. In the absence of insurance facility, the insured will have to approach several insurers to enter into various individual insurance agreement on the same property. This involves considerable cost, loss of valuable time and slower down the pace of protection cover.