What is reinsurance and how does it work?

What is reinsurance and how does it work?

Can you imagine that someone was waiting to give you back the trust you place in your children every time it was lost due to a prank? So, in a very similar way, this is how reinsurance works. An entity called a reinsurer assumes part of the risk that each insurer signs in its contracts.

In this way, the possible contingencies that can cause a loss or problem to insurance -its negative effects- are distributed among several entities, causing nobody or nothing to be exposed in a unique way to the dangers that the insured can generate.

The figure of reinsurance not only provides confidence and support to insurers, but its existence is also vital for the insured or insured themselves. If reinsurance did not exist, if that guarantees on which peace of mind is based for both parties, these would be much more expensive and difficult for the client to assume. In other words, the higher the reinsurance, the insurer will be able to cover higher volume risks.

Read on to learn more about what reinsurance is and understand the difference between insurance and reinsurance.

Because caring is not the same as caring

reinsurance concept

Going back to the idea that we have just introduced to explain the concept of reinsurance, you should know that, after all, reinsurance is an insurance contract through which an insurance company (which constitutes the ceding company ) becomes insured by another entity, which assumes the role of the reinsurer. This contract allows you to distribute the risks and limit the responsibilities in the event of a loss. We can say that it is the insurance of the insurance. With this contract, you can cover all or only part of the risk.

In short, through reinsurance, an insurance company protects its assets from the possible debt that it could incur when making its obligations effective, thus avoiding solvency problems.

If we go further and look for the definition of reinsurance in the Insurance Contract Law, in Art. 77 Law 50/80, the following is stated:

“ By the reinsurance contract,  the  reinsurer undertakes to repair, within the limits established in the Law and in the contract, the debt that arises in the patrimony of the reinsured as a result of the obligations of the latter, assumed as an insurer in a contract of sure .”

Reinsurance consists of the protection contracted by one insurer with another, by transferring all or part of the risks.

How does it work

The reinsurance contract does not affect the person who has subscribed the policy. The insured must demand the total compensation from his insurance company. Conversely, the insured may not demand said benefit from the reinsurer. In this way, the insured are left out of the agreement signed between the ceding company and the reinsurer.

Advantages of reinsurance

At this point in the article, you will be wondering whether or not there are advantages of reinsurance. with reinsurance we all have advantages. The reinsurers themselves win by finding a market and business niche, the insurers win by being able to offer more attractive and secure products with more advantageous conditions and the insured win because their insurance has a better impact on the clauses that protect them, more extensive and rich and in a lesser way on his pocket.

Our contingencies are covered by insurance companies that can face major contingencies as long as they rely on the mattress offered by the reinsurer, which means that they do not assume the risks alone.

It is a formula perhaps more unknown here in Spain than in other territories where it is very common and a well-known tool. Reinsurance has been working perfectly for many years in countries such as Germany, the United Kingdom, Switzerland, and France. Types Of Reinsurance And Why The Insurers Need It?

types of reinsurance

We distinguish different types of reinsurance based on two major reinsurance classification criteria.

Types of reinsurance according to mandatory

Reinsurance can be of several types depending on its obligation:

  • Mandatory: when the risks assumed are established in a contract
  • Optional:  when there is no reinsurance contract and the risks are communicated individually.
  • Mandatory-optional: when the contract is mixed, that is, optional for one of the parties (reinsured) and mandatory for the other (reinsurer),

Types of reinsurance according to risk

Different types of reinsurance can also be classified depending on their content, based on risk:

  • Quota-share: when the reinsurer participates in a fixed percentage of all the risks established in the contract.
  • Surplus: When this percentage of participation is variable according to the risk
  • Excess loss: when the reinsurer participates in those claims that exceed a pre-established amount or excess claims when a maximum percentage of total claims is set.

How reinsurance is legislated, rights and obligations

The General Directorate of Insurance and Pension Funds is the body that regulates reinsurance activity in Spain. As we mentioned above, articles 77, 78, and 79 of Law 50/1980, of October 8, on Insurance Contracts legislate and explain what reinsurance is.

In the first place, it defines it as “By the reinsurance contract, the reinsurer undertakes to repair, within the limits established in the Law and in the contract, the debt that arises in the patrimony of the reinsured as a result of the obligation assumed by the latter as insurer. in an insurance contract.

It also marks the benefits for the insured and their rights“The internal reinsurance agreement, made between the direct insurer and other insurers, will not affect the insured, who may, in any case, demand the entire compensation from the said insurer, without prejudice to the right of repetition that corresponds to it against reinsurers, by virtue of the internal agreement”.

But also their obligations insofar as they cannot demand compensation or benefits directly from the company with which they have been reinsured, and how they protect themselves in the event of liquidation (voluntary or forced) of the reinsured, over which “they will enjoy special privilege over the credit balance shown by the insurer’s account with the reinsurer”. In short, an internal contract between insurers, by which risks are reduced without impairing the rights and benefits of the insured.

reinsurance example

As we have seen, the reinsurance contract will allow insurers to assume greater risks regardless of their capital. The cases in which the risk to be insured is high are very different, but we bring you an example of reinsurance that is very easy to understand. We can find it in the coverage of an elite athlete or someone who regularly performs high-risk activities. Without a doubt, this is a clear example of why it is interesting to distribute the risks through reinsurance.

By allowing other insurers to take over part of the compensation, much higher-value policies or policies that are considered high-risk can be offered.

We hope this article has helped you understand what insurance reinsurance is . Now we invite you not to lose track of our Blog, which we update daily with new content related to insurance but also to health, lifestyle, savings, etc. We will wait for you!

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