Reinsurance can be understood as insurance of other insurance.
Reinsurance is a concept used in the insurance industry. Insurance is a service provided by a specialized company (the insurer ): through a contract, it undertakes to compensate for certain damages suffered by a person or an organization (the insured ). In exchange for this coverage, the insured pays a premium to the insurer.
Reinsurance, in this framework, is a new contract through which an insured assumes, either partially or totally, the coverage of a risk that had already been covered by another insurance firm , without modifying the agreement already established between it. and his client (the insured).
How reinsurance works
We can understand how reinsurance works by simplifying the operation. An insured Reinsurance arises when another insurer ( insurer 2 ) begins to assume the risks accepted by the first insurer ( insurer 1 ), leaving the terms agreed between insurer 1 and insured X unchanged. If the damage occurs now, the compensation must then be paid by insurer 2 , although always through insurer 1 ( insurer 2 and insured X do not have a direct link).
This type of operation is carried out when an insurer wants to reduce the amount of possible compensation that it must cover. To do this, it establishes a new contract with another insurer, without modifying the relationship already established with its own clients.
Two insurers are involved in reinsurance.
Distribution of bonuses and responsibilities
Through the reinsurance contract, the reinsurer accepts part of the risks (or all) and also receives, as previously agreed by the insurer, a proportion of the premiums accrued from the policy, as well as the payments of the claims that covers it. Broadly speaking, it is possible to distinguish two criteria for said distribution of premiums and responsibilities assumed in this contract:
Proportional reinsurance
The amount of liability assumed by the reinsurer if the loss contemplated in the contract occurs can be calculated by establishing a proportion between the premium it would receive (the one transferred by the original insurer, called the ceding party ) and that of the policy in total. In short, it participates in the same proportion of the premiums and the claims.
Non-proportional reinsurance
In this case, a new concept comes into play: a variable called XL or priority , which serves to describe a limit that is established to distinguish between the amounts that each party must cover, so that those greater than that are borne by the reinsurer. , while the lower ones are the responsibility of the insurer. In other words, the reinsurer must only respond to claims that are above a value established in the contract.
Reinsurance according to law
According to the law dictionary, this type of reinsurance is defined as insurance of other insurance; in this case, the one contracted in the first place, so that an insurer assumes, totally or partially, the responsibility of covering the risks that another insurer had insured, receiving in exchange a part of the premium and without the original contract having to be subject to no modification.
It is important to highlight that the individual insured is in no case affected by the relationship that his insurer has with others in matters of reinsurance; As mentioned above, this contract is entered into by the insurance company to share with another the responsibility it assumed with its client, and for this it gives up part of its profits, but it is something that happens behind the scenes from the point of view of the general public.