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Insurance and reinsurance offer financial protection to a person or company to protect against risk. Both allow the transfer of a possible loss from one entity to another, in exchange for a financial payment in the form of a premium. Each of these has the function of managing the risk, however, the risk is transferred in different ways.
Insurance is a tool used by people to manage risk. Insurance companies sell individual insurance policies designed to protect against financial loss. In return, a person pays the insurance company a fee (premium) for the policy. This serves as a promise that the insurance company agrees to reimburse the policyholder (insured) for his financial loss caused by a disaster or some other circumstance that leads to a loss of life or property that the policy is covering. For example, when the user of a car insurance policy has an accident, the insurer (insurance company) reimburses the money for injuries and damages to your vehicle.
Reinsurance is also a tool used to manage risk. Unlike insurance that protects individuals from financial loss, reinsurance protects the insurance company from financial loss. This offers protection insurance to the company with the dissemination of risk among several grouped insurance companies that agree to support the policies sold by a company. This allows an insurance company to cover more people without fear of incurring significant economic losses in the event of a disaster, resulting in multiple claims of the insured at the same time.
Types of policies
A number of insurance products exist to protect an individual’s property from potential loss. For example, an individual can buy life, housing or business liability insurance, to name just a few cases. Each product includes a different asset and offers different insurance benefits. Alternatively, reinsurance is a product purchased by an insurance company to protect against financial loss with the transfer of risk between several companies.
The premium paid by the individual for being insured goes directly to the insurance company that offers the policy. On the other hand, the payment of the premium made by the insurance company for reinsurance is shared with all grouped insurance companies.