Difference Between Insurance and Reinsurance

What is Insurance?

Insurance is a contract between the insurer (insurance company) and the insured (policyholder). The former promises to provide financial compensation for specific losses in exchange for a premium.

The details of the agreement, including covered losses and the payout amount, are outlined in the insurance policy.

Types of Insurance

There are two types of insurance — life insurance and general insurance:

• Life Insurance - Covers the insured’s life
  In case of death, a lump sum is paid to the nominee.
• General Insurance - Covers risks other than life, like fire, theft, and accidents
  Examples of general insurance include motor, health, and property insurance

What is Reinsurance?

A reinsurer provides financial protection to insurance companies by sharing large risks. Essentially, reinsurers help insurers manage risks that are too big to handle alone, which is why reinsurance is often called insurers’ insurance. Considering the high risk involved in the insurance industry, reinsurance is crucial as it protects insurers from potential bankruptcy. It allows insurers to take on larger business opportunities that might otherwise be too risky.

By spreading the risk across multiple reinsurers, insurance companies can avoid significant losses when a major claim occurs. This allows them to remain financially stable even during large-scale events.

Types of Reinsurance

Mentioned below are the major types of reinsurance —

• Treaty Reinsurance - The insurer gets coverage for all policies within a specific category or period
• Facultative Reinsurance - The insurer gets coverage for a single policy or a specific set of policies

Term Life Insurance Calculator