BMS 171: INTRODUCTION TO INSURANCE MANAGEMENT INDIVIDUAL

ASSIGNMENT
NAME: WANJA KARIUKI
ADM NO:E35/2079/2021

QUESTION 1
Subrogation is the right of an insurer to stand in the place of the insured and to avail to
himself all the right and remedies available to the insured whether such right have been
exercised or not.
Describe categories of subrogation (10marks)
Subrogation is a legal concept where one party, such as an insurance company, steps into the
shoes of another party to assert their rights and recover losses. It typically occurs in insurance
claims where the insurer pays the insured’s loss and then seeks reimbursement from the party
responsible for causing the loss. This process allows the insured to be compensated quickly,
while the insurer works to recover the funds from the at-fault party’s insurer. Subrogation helps
prevent the at-fault party from escaping financial responsibility and ensures that the burden of
the loss is placed on the party that caused it.Subrogation can generally be categorized into three
types:

1. Equitable Subrogation: This is the traditional form of subrogation that arises by operation
of law, not by a contractual agreement. It’s based on equity principles, meaning fairness
and justice, and it allows an insurer to step into the shoes of the insured to recover from
the party responsible for the loss.

2. Contractual Subrogation: This type occurs when the right to subrogate is established
through a contract. The terms and conditions of the insurance policy itself will often
include a subrogation clause that grants the insurer the right to pursue recovery after they
have compensated the insured.
 3.Statutory Subrogation: This type is established by statute or law. Certain laws may
provide the insurer with the right to subrogate, and these laws can vary depending on the
jurisdiction and the type of insurance.

These categories help define how and when an insurance company can seek reimbursement after
paying a claim to their insured party.

QUESTION 2
Discuss what is reinsurance and it’s benefits in the insurance industry (10marks)
Re-insurance is like a safety net for insurance companies. It’s a way for an insurer to protect
itself from large claims that could potentially drain its financial resources.Imagine an insurance
company that provides coverage for homes, cars, and health. Now, if a natural disaster strikes,
like a massive flood or earthquake, the company might face an overwhelming number of claims
all at once. To avoid the risk of going bankrupt from such large payouts, the insurance company
can transfer some of its risks to another company, called a reinsurer.
The reinsurer agrees to take on this risk in exchange for a portion of the premiums. If a disaster
happens, the reinsurer helps cover the costs, ensuring that the original insurer can fulfill its
promises to its policyholders without jeopardizing its financial stability.
Re-insurance is crucial because it distributes risk across multiple companies, making the
insurance industry more resilient. It allows insurers to handle larger policies or a greater number
of policies than they could on their own, knowing they have a backup if things go south. This
system supports the overall health of the insurance market, providing a buffer against
catastrophic events that could otherwise lead to financial disaster for insurance companies and
their customers.
Reinsurance offers several benefits to the insurance industry, and here are some key advantages:

1. Risk Management: It allows insurance companies to manage their risk exposure by

sharing potential large losses with reinsurers. This helps in maintaining financial stability
and solvency.

2. Capital Relief: By ceding part of their risks, insurers can reduce the amount of capital
they need to hold in reserve to cover potential claims. This frees up capital for other
investments or to underwrite new policies.
3. Capacity Expansion: Reinsurance increases an insurer’s capacity to underwrite more
policies because the risk is spread out. This means insurers can take on larger or more
numerous policies than they could handle alone.

4. Stabilization of Losses: It helps to stabilize an insurer’s loss experience by smoothing out

the financial impact of large or catastrophic claims over time.

5. Global Reach: Reinsurance connects local insurance markets with the global financial
market, allowing risks to be diversified internationally.

6. Expertise and Support: Reinsurers often have specialized expertise in underwriting

complex risks and can provide valuable support and advice to insurers.

7. Innovation: The reinsurance market can drive innovation in the insurance industry by
developing new products and coverage options to meet evolving risks.