CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND TO THE STUDY

Generally, Insurance plays a pivotal role in the transfer of risk across all spheres of life. The concept of insurance refers to a contract between two parties where one party promises to indemnify the other party for the occurrence of any risk covered under the contract in exchange for a monetary consideration called premium (Ogwo, 2000). The party who makes this promise is referred to as an insurer and is a limited liability company. This company also faces several risks and this necessitates the ceding of these risks with a larger insurance company. This process is conceptualized as reinsurance.

By definition and explanation, one can describe ‘Reinsurance’ as the practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The intent of reinsurance is for an insurance company to reduce the risks associated with underwritten policies by spreading risks across alternative institutions. Overall, the reinsurance company receives pieces of a larger potential obligation in exchange for some of the money the original insurer received to accept the obligation. The party that diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer.

In developing and emerging economies, reinsurance companies spring up back bone to support the insurance business. They serve as a supportive factor to establish confidence policy holding in insurance companies, reinsurance also allow the direct insurer to free themselves from the part of a risk that exceeds their underwriting capacity, or risks which, they do not wish to bear alone. However, the situation in Nigeria seems different. Despite the existence of reinsurance in insurance sector in Nigeria, the development of the sector remains poor.