Reinsurance the essence, forms, and importance of financial stability in insurance companies
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Date
2019
Authors
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Journal ISSN
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Publisher
Ivane Javakhishvili Tbilisi State University Press
Abstract
Reinsurance - is an independent form of insurance. Its purpose is to protect the insurer
from possible financial loss. Through reinsurance the insurer can increase the volume of
its insurance portfolio, the insurance company can protect itself from the dangers of great
loss, the insurance company can take on full risk, and subsequently it can insure itself with the help of other insurance companies. Reinsurance can minimize risks such as: risk of accidental loss, risk of changes, risk of error. Reinsurance aims at creating a balanced
insurance portfolio, ensuring financial sustainability and cost-effective insurance operations. Analysis of regional (geographical) diversification of reinsurance by insurance premiums allows us to conclude that the noted form of risk reduction is highly diversified regionally; insurance premiums are unevenly distributed depending on the forms of insurance. Globally, reinsurance is done on the risks associated with property, which are caused by the high probability of catastrophes in this area, which will consequently result in large losses for the insurance company. The ongoing globalization process in the world economy results in the concentration of reinsurance capital, with the number of large reinsurance companies increasing. The following subdivision of insurance contracts is made according to the form of obligations taken jointly by cedent and the reinsurer:
• Facultative reinsurance
• Obligatory reinsurance
• Facultative-obligatory (mixed) reinsurance
Georgian insurance companies mainly use obligatory reinsurance and facultative
reinsurance in case of necessity. Proportional reinsurance takes precedence over reinsurance methods as it is directly related to the magnitude of the insurer’s insurance liability.
The increasing importance of reinsurance is conditioned by the high degree of financial
risk that depends not only on natural disasters but also on economic crises, inflation, political processes in the country, and others. During reinsurance, part of the profit is transferred from direct insurer to reinsurer. Reinsurance is the “secondary” insurance of the insurer against such risk that exceeds the solvency of the insurance company. The reinsurance market is an international business, as its primary purpose is the secondary distribution of risks, which can be secured mainly by attracting foreign capital. The reinsurance market mostly is a subject to the process of globalization merging, which is the result of the increase in the reinsurer’s capitalization to enable it to provide the necessary financial resources to reinsure natural disasters.
Description
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Keywords
reinsurance, facultative reinsurance, obligatory reinsurance, facultative - obligatory reinsurance, cedent, cesium
Citation
Economics and Business, №3, 2019, pp. 126-133