From an insurance company’s perspective, there are at least four fundamental functions provided by reinsurance, viz:
1. Reinsurance is an effective and convenient way to spread the insurer’s risk portfolio over different risk carriers as well as territories.
2. Reinsurance provides underwriting capacity to the insurance market, enabling it to fulfil the needs of the public, in particular the insurance of large industrial and mega risks.
3. Reinsurance acts as a back-up to the insurance market against the risk of ruin arising out of any catastrophic event. 4. Reinsurance is a cost-effective substitute for capital.
————————————————————————– Adopted from Akoob, M. (2008). Reinsurance and Retakaful. In S. Archer, R. Karim, & V. Neinhaus, Takaful and Islamic Insurance: Concept and Regulatory Issues.Singapore: John Wiley & Sons (Pte).