Reinsurance

Insurance | Insurance Ordinance | Insurance Rules | Reinsurance | Glossary

(courtesy: Mr. M. A. Chishti)

When insurance progressed considerably, insurance companies found themselves-committed to huge sums having been insured. They realized that in case of a catastrophic loss, they would go bankrupt. Therefore, the need of reinsurance was felt very keenly, and it came into existence and specialist reinsurance companies were established. Every insurance company now has to arrange for reinsurance before starting business and taking on big commitments. For example, suppose an insurance company insures a factory for one hundred million rupees. In case of total loss, it will be beyond the capacity of the insurance company to pay this loss. The insurance company feels that it can retain only one or half percent. i.e. one million or five hundred thousand rupees on its own account; so, it cedes the rest of the surplus by way of reinsurance. The re-insurers also do not retain all the business which they receive from direct insurance companies but reinsure with other re-insurers. Thus, through a criss-cross of reinsurance, the risk is spread over a large number of companies operating in many countries, and in case of a catastrophic loss there is no danger of any one going bankrupt. In case of a claim, all re-insurers pay according to their shares. Thus, reinsurance is the backbone of insurance.

In Pakistan, insurance companies operate under the Insurance Act, 1938, and before getting a licence to commence business or obtain renewal of licence, they have to satisfy the. Controller of Insurance now Executive of Insurance in Securities and Exchange Commission of Pakistan, regarding their reinsurance arrangements. During 1986, five indigenous insurance companies could not get their licences renewed because their reinsurance arrangements were not adequate. This requirement is imposed by the government of Pakistan to protect the interest of policy holders.