Difference Between Insurance and Reinsurance

Insurance and Reinsurance are important terms that are used with respect to financial protection. Similar they might sound but the meaning of both these terminologies is different. Insurance and Reinsurance are terms used to define financial protection either to an individual or a company against the risk. Both these terms allow either an individual or company to transfer their potential loss to other entities in exchange for premium payments. Both these terminologies function to pool the probable risk; however, the probable risk is transferred in varied ways. Let us understand the difference between insurance and reinsurance in detail.

Insurance can be simply defined as an act of indemnifying the risk caused to another person. While reinsurance is an act when an insurance providing company purchases an insurance policy to protect itself from the risk of loss. Even though both the terminologies are similar to each other in terms of protection they provide but their application varies.

Additionally, insurance is the simplest form of financial protection to cover the risk of loss. However, reinsurance is a different type of financial protection. Under reinsurance, the insurance company shares the risk of loss with another insurance provider i.e. when a particular insurer does not intend to bear the whole risk by sharing it with another insurance company. Under reinsurance, the risk of loss is contemplated and underwritten by the other insurance providing company.

Insurance and Reinsurance Comparison Chart

Definition of Insurance

Insurance is a contract between two parties, one is the insurance provider and the other is an individual. The insurance provider is called the insurer. An insurer is a party which agrees to mitigate the risk, while the individual covered under an insurance policy is called the insured. Under the insurance contract, the insured agrees to cover certain losses caused to the insured. The insurance contract is represented in an insurance policy that states all the terms and conditions related to indemnification of the risk. Insurance is broadly classified into two types namely:

1. Life Insurance: Life insurance as the name suggests is a type of insurance policy that indemnifies the risk associated with the loss of life. Under life insurance, the benefits are paid to the nominee in the event of the death of the life insured.
2. General Insurance: General insurance covers the risk of loss for other than life insurance. General insurance includes Fire Insurance, Marine Insurance, and other types of insurance.

Definition of Reinsurance

Reinsurance is a contract between two parties where both parties are insurance providing companies. Here, the insurance company obtaining risk cover is called the ceding company, while the insurance provider who offers risk coverage from probable risk is known as the reinsurer. Under a reinsurance contract or agreement, both parties agree to transfer and accept risk under a pre-determined proportion. Reinsurance comes into the picture when some risks are very high for an insurance provider to bear alone. In such a scenario, the ceding company insures the entire risk and then passes on a certain portion of the risk to the reinsurance company; under this, the ceding company retains only such a portion of risk which it can bear. Under the reinsurance agreement, the premium amount received by the ceding company is shared with the reinsurance company in the agreed ratio. Reinsurance is of two types namely: Facultative Reinsurance and Treaty Reinsurance

Final words

Insurance and reinsurance are related to the covering of risk and losses, however, they both work in different areas. Insurance is between insurance companies and individuals while reinsurance is between two insurance providing companies.