The Nature of Reinsurance - (article published by ART Ins. Services Limited)
The Nature of Reinsurance Reinsurance, at its essence, is a risk transfer and risk spreading mechanism that is consistent with and further supports the basic theory of insurance. Insurance is about spreading of risk. Insurance works only because many policyholders pool their risks of loss and transfer portions of those risks to an insurance company. The insurance company, having accepted potential losses from many policyholders, is able to charge an affordable premium to each policyholder based on the probability that only a few of the potential losses will actually occur and have to be paid. Thus, by pooling risks together through an insurance company, insureds are able to insure their risks at a reasonable price, which would otherwise not be possible if the risks of all insureds had not been pooled together through an insurance company . Spreading Risk through Reinsurance Just as policyholders spread their risks of loss by purchasing insurance from a company that co