Reinsurance

economic-dictionary

Reinsurance is a contract by which an insurance company transfers all or part (usually the latter) the risks assumed by granted policies. This, to another company called reinsurer (or reinsurer) that, in return, receives a part of the premiums collected.

In other words, it can be said that reinsurance is the insurance of insurance. Thus, the insurance company seeks to reduce possible losses so that, if the covered claim occurs, the costs will be lower.

The reinsurer, for its part, receives a portion of the premiums collected and, in the event of a claim, must pay compensation to cover part of the expenses necessary to meet the commitments assumed by the policies delivered.

Characteristics of a reinsurance

Thus, before continuing, it is convenient to point out some important characteristics and to take into account.

Therefore, it is important to mention that reinsurance is a very sophisticated type of contract, the contracting parties being specialized companies.

Another point to keep in mind is that this type of policy is subject to the legislation of each country.

It is also important to clarify that the reinsurance contract does not imply that a relationship is established between the insurer's client (the insured) and the reinsurer.

The only person responsible for the payment of compensation to the insured is the insurer, not the reinsurer. Thus, the reinsurance contract involves only a relationship between the insurer and the reinsurer.

Reinsurance contracts serve to diversify a high risk assumed. In this way, it becomes more viable for insurers to agree to cover, for example, large catastrophic risks.

Elements of a reinsurance

The elements of a reinsurance are the following:

  • Direct insurer or transferring insurer: It is the insurer that has granted certain policies and seeks to reduce the risk assumed through an agreement of this type. It can also be called reinsured.
  • Reinsurer: It is the company that agrees to cover the direct insurer.
  • Assignment: It is a term that refers to the percentage of risk that is transferred to the reinsurer.
  • Retention: It is the part of the risk that the direct insurer does not transfer to the reinsurer.
  • Retrocession: When the reinsurer takes out reinsurance for itself.

Types of reinsurance

The main types of reinsurance are the following:

  • Proportional: The insurer and the reinsurer agree on the percentage of the premiums and the risks that each of the parties will assume.
  • Non-proportional: They are those that do not consider the sum insured. The insurer assumes losses up to a certain amount established in the contract, and the reinsurer agrees to reimburse the insurer - up to a maximum - for losses above that fixed level.

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