Fakih Wahyudi: Reinsurance to your capital

For your who work in accounting division.
People may know that Debt and Equity is the couple of the balance sheet.
Actually, there is another third content called REINSURANCE.
Here we will discuss REINSURANCE AS THIRD CAPITAL.
When insurance company underwrite the risk, they have limitation for the retention due to limitation of Capital.
By using REINSURANCE they can underwrite the risk beyond their capital. Say, when the company has equity for USD. 50 millions, they only prefer or allowed to underwrite/retain for 10% equal to USD. 5 millions.
Using REINSURANCE, they would able to retain the risk for more than USD. 5 millions (gross retention) and also able to underwrite the risk with sum insured for more than USD. 50 millions.
Originally, in reinsurance, insurer owe the capital of the Reinsurer, in their limitation, using Reinsurer Capital to underwrite the risk beyond their equity or retain risk more than their limitation or underwrite the risk and then transfer it for undesirable portion of the risk.
At the end, insurer will able to get higher premium income to the company and at the bottom result will create PROFIT to the company.
With the profit, insurance company will able to allocate portion of the capital say for Reserve and increasing asset.
Therefore, this brief analysis, we will aware that REINSURANCE is a major part of insurance business. Using REINSURANCE mechanism, insurance will able to: