What is reinsurance?

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Reinsurance serves the risk management objectives of an insurer; the aim being to minimize
the risk of default through major losses. Reinsurance follows the concept of spreading the
burden of risk among several insurers, through continuity and security of business. For these
reasons, the reinsurance is also seen as an insurance for insurers.

It allows the insurer to take over large risks (such as aircraft, industrial plants or even an entire
liability company), the insured must therefore not conclude contracts with various insurance
companies.

This form of insurance covers individual risks or entire portfolios (several individual risks with
common characteristics). Completely or only partially, under conditions negotiated using the
reinsurance ratio, as such an existing insurance will be dissolved. This is done without
interfering with its regulatory content - the contract is therefore not changed.

Many large corporations have their own insurance, these have direct access to the reinsurance
market. The principle of reinsurance is as simple as that of insurance. The Commercial Code
provides articles specifying that the reinsurer is the insurer of the insurer.

This involves the insurance company (the transferor) transferring to a specialized company (the
reinsurer) a random risk (consequences of a fire disaster, death, an earthquake or shipwreck,
etc) against the settlement of a reinsurance premium equal to the risk transferred. And the
transfer mode specified in the reinsurance agreement.

The insurance company then known as the transferor (or primary insurer) makes an assignment
with one or more reinsurers through a reinsurance contract (or program). A reinsurance contract
exists in many forms and can cover a period or not, although most reinsurance contracts have a
term of one year.

The reinsurance contract is legally binding on the ceding its reinsurer. Thus, the transferor shall
reimburse the insured claimant even if the reinsurer refuses to pay the assignor (eg due to
different interpretation of the clauses of the reinsurance contract).

An insured individual or company are usually unaware of the existence of a reinsurance contract
and they have no contact with the reinsurer(s). This explains the lack of public awareness in
general of the reinsurance mechanism, except when the media refers to the reinsurance during
major catastrophes like the World Trade Center attacks.

Generally, a distinction between compulsory reinsurance and facultative reinsurance
(reinsurance on an individual basis). Under compulsory reinsurance, entire portfolios are
reinsured by a primary insurer, whereas the facultative reinsurance deals with a specific risk.

A distinction in reinsurance contracts between pro rata proportional risk sharing (proportional
reinsurance), are in the premium and losses taken in equal shares, and non-proportional risk
sharing (non-proportional reinsurance). And absorb the remaining loss up to a certain amount in
excess of the insurer, and the above excess share of the reinsurers are incorporated.

Contracts are concluded by the assignor or through brokers. Business through brokers often
involves multiple reinsurers and each takes on a certain fraction of the insured risk.
Reinsurance brokers also offer additional services which include

- consultation and participation in the claims assessment,
- review and assessment of special risks,
- introduction of and support for rehabilitation in the primary insurance sector
- Advice and support in the portfolio design,

- training of staff of the assignor,
- underwriting, reinsurance design, advice and support in the field of alternative risk transfer.
- implementation of the settlement procedures,
- adoption of actuarial tasks, advice and support in non-technical issues,
- providing information and contacts on insurance markets,
- offer advice on the use of computer equipment, development of expert systems, etc.

				
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posted:11/16/2012
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