Professional Documents
Culture Documents
Insu 2 Insurance Contact
Insu 2 Insurance Contact
Covered Topics: Principles of Insurance Contract; Elements of general Contract; Conditions for
indemnity Principles; Essentials of doctrine of subrogation; Wagering and insurance,
Reinsurance, Types of Reinsurance, Double insurance; and Return of premium.
❖ Reinsurance
Reinsurance is insurance for insurance companies. Reinsurance is the mechanism that insurance
companies use to lower their risk or reduce their exposure to a specific catastrophic event.
According to M. N. Mishra, “Re-insurance is an arrangement whereby an original insurer who
has insured a risk, insures a part of that risk again with another insurer.
Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other
parties by some form of agreement to reduce the likelihood of paying a large obligation resulting
from an insurance claim. 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.
For example, when Hurricane Andrew caused $15.5 billion in damage in Florida in 1992, seven
U.S. insurance companies became insolvent because they were unable to pay the claims resulting
from the disaster.
❖ Types of Reinsurance
Generally, reinsurance policy reduces the losses sustained by insurance companies by allowing
them to recover all, or part, of the amounts they pay to claimants. Reinsurers help insurance
providers avoid financial ruin in case a huge number of policyholders turn out to make their
claims during catastrophic events. Below are some of the major types of reinsurance policies.
a) Facultative Coverage: This type of policy protects an insurance provider only for an
individual, or a specified risk, or contract. If there are several risks or contracts that
needed to be reinsured, each one must be negotiated separately. The reinsurer has all the
right to accept or deny a facultative reinsurance proposal.
b) Reinsurance Treaty: Treaty reinsurance represents a contract between the ceding
insurance company and the reinsurer who agrees to accept the risks of a predetermined
class of policies over a period of time. Here, reinsurer agrees to cover all or a portion of
the risks that may be incurred by the insurance company being covered. Treaty
reinsurance is insurance purchased by an insurance company from another insurer. The
issuing company is called the cedent, treaty reinsurance gives the ceding insurer more
security for its equity and more stability when unusual or major events occur.
c) Proportional Reinsurance: Proportional reinsurance coverage is reinsurance of part of
original insurance premiums and losses being shared between a reinsurer and insurer.
With proportional reinsurance coverage, the ceding company and the reinsurer share risks
and premiums on a proportional basis. The insurer and the reinsurer both share the
premiums and the claims on a given risk in a specified proportion.
d) Non-proportional Reinsurance: Non-proportional reinsurance, or excess of loss basis, is
based on loss retention. The ceding insurer agrees to accept all losses up a predetermined
❖ Double Insurance
Double insurance is a type of insurance where the same subject matter is insured more than
once. In such cases the same subject is insured, but with different insurers. The method of double
insurance is considered a legal act. In case of loss the insured can claim from both the insurers
and the insurers are liable to pay under their respective policies.
The features of double insurance are:
i. subject matter is insured with two or more insurance companies;
ii. the insured can claim the amount from the policies; and
iii. the insured cannot claim more than the actual loss.
Double insurance also follows the basic principles of insurance.