What Is Reinsurance

Reinsurance is essentially a specialized kind of insurance performed between professionals; thus, many of the principles and standards that govern the conduct of insurance business also apply to reinsurance. However, several ideas have various applications in reinsurance.

A simple definition of reinsurance is the acceptance by one insurer, known as a reinsurer, of all or part of another insurer’s risk of loss, known as the ceding company.

Parties to a Reinsurance Contract

A reinsurance contract has two parties: the insurance company and the reinsurer. Insurance firms are typically exposed to a huge variety of hazards at any given time. These policies are legal agreements between the insured and the insurance company. When an insurance firm agrees to spread its risks through reinsurance, a portion of those risks are reinsured with a reinsurer. Thus, a reinsurance contract exists between an insurance company and a reinsurer.

It is vital to highlight that the policyholder is not one of the parties to the reinsurance contract. The policyholder has only one contract with the insurance company. Thus, the policyholder has no rights against the reinsurer, and the reinsurer has no duties toward the policyholder.

Principles of Reinsurance

In many places around the world where reinsurance is practiced, the legal rules that apply to reinsurance are also applicable to insurance. From the standpoint of the reinsured, the buyer of reinsurance cover, there is a responsibility of greatest good faith, and the reinsured must have a “insurable interest” in the risk being reinsured. The reinsured can only bring a legitimate claim if the “principle of indemnity” is also met.

Utmost Good Faith: it is natural that a greater degree of transparency should be expected in a reinsurance agreement than a simple commercial contract. Thus there is an obligation on the party (insurance company) seeking the cover to disclose all material facts so that the contract will accurately reflect the actual risk(s) being covered.

Insurable Interest: The insured must have an “insurable interest” in the subject matter of the policy, or such policy will be void as it will be considered gambling. An insured has an insurable interest in policy when they can show some type of financial benefit from the existence of the subject matter to be insured, or that they will suffer a pecuniary loss from the loss of such subject matter should the risk covered by the insurance policy occur. Equally a reinsured must have an “insurable interest” in the subject matter of the reinsurance. An example of insurable interest can be seen in this situation – the reinsured wishes to obtain reinsurance to cover fire outbreak in a particular building, but it does not have any property or risks there, then the reinsurance will be considered null and void.

Indemnity: The principle of professional indemnity insurance dictates that an insured or a reinsured should not profit from the cover it buys, but should only be compensated for its actual loss, thus settlement depends on the terms of the contract and the real amount of loss suffered