This document provides an introduction to reinsurance. It begins by explaining that reinsurance exists because insurance companies need ways to manage large risks that exceed their individual capacities. Reinsurance allows insurance companies to transfer portions of risks to reinsurers. The document then defines reinsurance as "insurance for insurance companies" whereby a reinsurer takes on part of the liability from an insurer for a given policy. The main purposes and functions of reinsurance are then outlined as increasing insurers' underwriting capacity, providing financial stability, and strengthening insurers' finances. The document concludes by briefly describing the main types and methods of reinsurance.

1. INTODUCTION TO
REINSURANCE
Prepared By:
Salum Mlaponi,
Dip CII

2. INTRODUCTION
Every day we and our possessions are
exposed to many and innumerable risks
These risks are unforeseen and can
cause damage to us and our properties
and no one knows when these risks will
occur or the extent of damage they will
cause if they occur.

3. INTRODUCTION
Examples of these risks are:-
I. Natural Perils- Earthquakes, Seaquakes
(Tsunamis), floods, Hurricanes, Typhoons,
Tornadoes etc
II. Man made perils
III. Nuclear disasters
IV.Fire, Theft, Illnesses, Accidents, Epidemics,
Criminal Acts, etc.
But Man’s desire for security and his wish to provide
against future uncertainty lead to find the way to

4. INTRODUCTION
Risk threaten our lives and the threat can be only
dealt with through the process of risk management.
Risk management is the process aimed at
eliminating or minimizing the adverse effects of
accidental losses.
Risk management involves risks control measures
and risk financing.
Risk control aim at minimize the frequency and/ or
severity of the loss.
Risk financing aim at providing finance to make
good after risk occurrence. Eg. Insurance.

5. INSURANCE The idea of Insurance come from the
notion of supporting one another.
Insurance is part of risk financing, its
core business is to accept risk from the
insured with the promise to indemnify
them in case of a loss occurrence.
The main function of insurer is to
provide financial protection against the
loss or damage caused by specified
perils.
But sometimes risks may be a very large
and beyond the capacity of an
individual insurance company or market
to retain in full.
In such case insurer may opt to decline,
limit the acceptance, share the risk with
other insurer, reinsure.
.

6. REINSURANCE
Reinsurance exist because of Insurance. That’s to say it is impossible
to have reinsurance without there is insurance at the first place.
Reinsurance is a business of insuring an insurance company or
underwriter against suffering too great a loss from their insurance
operations.
This allow an insurance company or underwriter to lay off or pass on
part of their liability to another insurer on a given insurance which
they have accepted.

7. DEFINITION OF REINSURANCE
A legal definition of reinsurance was given by Lord
Mansfield in the case of Delver v. Barnes (1807),
that reinsurance:
 “Consists of a new assurance, effected by a new
policy, on the same risk which was before insured
in order to indemnify the underwriters from their
previous subscription, and both policies are in
existence at the same time”
 In summary, reinsurance is insurance for
insurance company.
 The definition provided by Lord Mansfield relate

8. REINSURANCE
PROCESS
 The Insured transfer the risk to a
direct insurer.
 The direct insurer accepts the risk,
for which he is fully liable to the
policy holder.
 If the direct insurer does not want to
keep the entire risk, he cedes a share
to one or more reinsurers.
 The reinsurer accept a share of the
Insurer
Reinsure
r

9. PURPOSE AND FUNCTION OF
REINSURANCE
Increase Capacity
Reinsurers provide insurers with
additional underwriting capacity which
enables them:-
To accept larger risks than otherwise
would be possible;
To write types of business which
normally they would prefer to avoid

10. PURPOSE AND FUNCTION OF
REINSURANCE
 Example
A complex mall with an overall sum insured of TZS
10B offered to Strategis Insurance, which only
wishes to retain TZS 4B in net account.
Placement of this risk can be only achieved either
with support of reinsurance or by the use of co-
insurance.
Reinsurance allow insurer to accept the whole risk
and pass on TZS 6B to one or more reinsurer.
Therefore, if a loss occur at the Mall, Strategis is
fully liable up to a maximum of TZS 10B but it can it

11. PURPOSE AND FUNCTION OF
REINSURANCE
FINANCIAL STABILITY
Reinsurers absorb the impact of
large losses or an unexpected
series of medium or small losses,
which could lead to wide
fluctuations in results which can
be very damaging to its image
with the public and great concern
to share holders; and in so
doing, the Reinsurer:
Protects the insured against
sudden fluctuations in the cost of
cover (premium rates).
Protects the share holders of the
insurance company against a
considerable reduction or even
the loss of the registered capital.
This guarantees the share
holders a constant and possibly
increasing yield.

12. PURPOSE AND FUNCTION OF
REINSURANCE
STRENGTHENING OF FINANCES:-
Reinsurance gives the following financial
advantages:-
 Protects the Insurers’ balance Sheet and the
Profit and Loss accounts
 Protects image/Reputation of the insurer- ability
to pay claims
 Protects market share of the insurer - by giving
capacity to write for growth and pays claims in
time,
 Protects share prices

13. PURPOSE AND FUNCTION OF
REINSURANCE
Protects/Enhances the solvency
margins of the Insurance
Companies. Solvency Margin is
the ratio between capital &
reserves as a percentage of the
premium income. The ratio must
be greater or equal to a % age
required by law, e.g. 15% in
Tanzania.
EXAMPLE:
Capital & Free reserves:
30,000,000
Premium Income: 200,000,000
Solvency Ratio: 30m/200m x 100
= 15% without reinsurance.
With reinsurance :Assuming a
premium cession of
150,000,000, then solvency ratio
will be 30m/200m-150m x 100
= 60%

14. PURPOSE AND FUNCTION OF
REINSURANCE
Risk
Avoid
Decline
Prevent
Add
Warranties
Limit
Fix retention &
limit of
insurance
Transfer
Reinsurance
Accept/Retain
Put up with a
loss
 Spreads Risk
 Insurance protect
people against financial
consequence of the risk
they can avoid.
 In much the same way
an insurance company
can not avoid risk, it
must take on risk in
order to earn premium.
 In similar way,

15. TYPES AND
METHOD OF
REINSURANCE
Reinsurance
Facultative
Proportional
Quota Share
Non-
Proportional
Excess of
Loss
Treaty
Proportional
Quota Share Surplus
Non-
Proportional
Excess of
Loss
Stop Loss
Reinsurance is broadly
categorized under two
branches that is treaty
reinsurance also known
as obligatory
reinsurance and
facultative reinsurance
also known as optional
reinsurance.
 These two branches can
be further broken down
in two sub-categories
i.e. Proportional

16. ANY QUESTION?
END