Reinsurance
The practice of an insurer transferring part of its own risk to another insurer or reinsurance firm, so that no single insurer is left exposed to the whole of a large claim.
In plain language
An insurer that writes a very large policy is itself carrying a risk. If the claim comes in, the insurer has to pay the whole of it.
Reinsurance is how insurers manage that. The workbook's own words: it is "the practice whereby insurance companies transfer portions of their risk to other parties/Reinsurance firms by some form of agreement," done "so as to spread the risk widely among as many parties as possible so that no single party is affected in case of a large claim."
The insurance company buying reinsurance is, in effect, insuring itself.
How it works
The workbook names three kinds of broker in this market. A Direct Broker solicits and arranges ordinary insurance business for clients with multiple insurers. A Reinsurance Broker does the same job one level up — soliciting and arranging reinsurance for its clients or for insurance companies, with multiple insurers and reinsurers, in India or abroad. A Composite Broker is both a Direct Broker and a Reinsurance Broker at once.
Reinsurance policies get the same GST treatment as the underlying insurance they sit behind. The workbook records that all individual health insurance and reinsurance policies are exempt from GST with effect from 22 September 2025, and separately that all life insurance and reinsurance policies carry the same exemption from that date.
A worked example
Illustrative figures. Sunrise General Insurance writes a single fire policy on a factory for a sum insured of Rs 500 crore. Carrying that whole exposure alone would threaten the insurer's own solvency if the factory were destroyed.
Sunrise instead reinsures Rs 350 crore of that exposure with two reinsurance firms, keeping Rs 150 crore on its own books. If the factory burns down and the full Rs 500 crore claim falls due, Sunrise pays Rs 150 crore from its own funds and recovers Rs 350 crore from its reinsurers, rather than absorbing the entire loss itself. Sunrise deals with a Reinsurance Broker to place and arrange this cover across the two reinsurers.
Why NISM asks about it
Chapter 1 (Basics of Insurance), section 1.8.3, "Regulatory aspects for insurance intermediaries," defines reinsurance and the three broker types, and section 1.8.1 records the September 2025 GST exemption for reinsurance policies alongside ordinary insurance. Expect a question asking which broker type deals in reinsurance, or the effective date of the GST exemption.
Common exam traps
- Reinsurance is bought by the insurer, not by the original policyholder. The policyholder's contract remains with the original insurer regardless of how much of the risk is reinsured.
- A Composite Broker is not a separate, third category of business — it is a Direct Broker and a Reinsurance Broker combined in one licence.
- The GST exemption date, 22 September 2025, applies to both individual health/reinsurance policies and life/reinsurance policies — do not treat it as a single life-insurance-only change.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Insurable interestThe requirement that the person seeking insurance would suffer a monetary loss if the subject matter were lost or destroyed — the test that separates insurance from a wager.
- Risk retentionBearing the financial consequences of a risk oneself, instead of paying an insurer to take it on — the alternative to risk transfer, and the default position for anyone without insurance.
- Large number of exposure unitsThe first requirement of an insurable risk: large groups of similar though not identical units must face the same peril, so that only a few of a large pool suffer loss in any one year.
- SubrogationThe insurer's right to step into the shoes of the insured after paying a claim, and to pursue and recover the loss from whoever was actually at fault.