What is Reinsurance and Double Insurance

Reinsurance and Double Insurance

Generally, reinsurance and double insurance are used interchangeably but they are two distinct terms, as is evident from the following:

  • Reinsurance: When an insurance company gets its risk insured from another insurance company, then it is called reinsurance. In this insurance contract, both the insured as well as the insurer is insurance companies. When an insurance company finds that its risk has exceeded a certain limit, it transfers a part of the risk to some other insurance company by taking reinsurance of certain items. This contract does not affect the contract between the main insured and the insurer. For example, a person gets an insurance policy for Rs 5,00,000 on his house from the New India Assurance Company. The company considers it to be an excessive risk coverage (i.e., in case of any damage to the house, the company will not be able to compensate the insurer easily) and it gets an insurance policy on the same house from the National Insurance Company for Rs 3,00,000. After some time, the house is completely destroyed. The insurer will get Rs 5,00,000 from the New India Assurance Company. On the other hand, the New India Assurance Company will get Rs 3,00,000 from the National Insurance Company. In this way, the first company has reduced its risk up to Rs 3,00,000. 

  •  Double Insurance: Double insurance stands for insurance of the same property or person more than one time by the insurer himself. Double insurance has implications for life insurance and general insurance (fire insurance, marine insurance, etc.) For instance, a person can get any number of life insurance policies of any amount. He will get the pre-determined amount in case of his death during the period of policy or on the date of maturity of the policy, whichever is earlier. It means a person can take the benefit of double insurance. On the other hand, even in case of general insurance an insurer can get more than one insurance policy on the same property, but in the situation of damage the loss suffered will be shared by all the policies taken and compensation will be paid on all the policies collectively which will not exceed the actual amount of the loss suffered.
For instance, a person gets his house insured from Aand B insurance companies for Rs 40,000 and Rs 60,000 respectively. If that person suffers a   loss of Rs 40,000 due to the damage to his house, then he can either claim Rs 20,000 each from both the companies or he can compensate his loss by claiming Rs 40,000 from one company only. Later on, on the basis of the principle of contribution both the companies will divide the compensation paid according to the ratio of the insured amount to them. The amount paid will be distributed will be A Co. and B Co.Rs 16,000 and Rs. 24,000 respectively.

Basically, both the terms are interrelated to each other.

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