a) INTRODUCTION
This
is an insurance that is purchased by an insurance company called a cadent under
the arrangement. From another insurance company called a reinsurance for the
purpose of managing risk. The agreement under which a cedant enters is called a
reinsurance agreement which details conditions upon which
the reinsurance would pay the premiums and the risk under whichthe insurance is
insured from.
Re
insurance companies can be specialized company which undertakes to insure
against a specific type of risk. The risk indemnified against is the risk that
the insurer will have to pay on the underlying insured risk. Because
reinsurance is a contract of indemnity, absent specific cash-call provisions,
the reinsurer is not required to pay under the contract until after the
original insurer has paid a loss to its original insured.
Reinsurance
is a contract made between an insurance company and a third party to protect
the insurance company losses. The contract provides for the third party to pay
for the loss sustained by the insurance company when the company makes a
payment on the original contract.
A
reinsurance contract is a contract of indemnity, meaning that it operates only
when the insurance company has made a payment to the original policy-holder.
Reinsurance provides a way for the insurance company to protect itself from
financial disaster and ruin by passing on the risk to other companies.
Reinsurance
redistributes or diversifies the risk associated with the business of issuing
policies by allowing the reinsured to show more assets by reducing its reserve requirements.
In the case of Amlin Corporate
Member Ltd v Oriental Assurance Corporation[1]
Amlin were the reinsurers of Oriental under a policy governed by English
law and subject to exclusive English jurisdiction. Oriental had insured
Sulpicio, a Philippine shipping company in respect of liability for cargo
claims. The reinsurance contained a warranty under which an insured vessel was
not to sail out of sheltered port when there was a typhoon or storm warning at
that port, nor when the destination or intended route may be within the
possible path of the typhoon or storm announced at the port of sailing, port of
destination or any intervening port. The original policy contained a warranty
in similar terms. The vessel Princess of the Stars was lost when she
sailed into the eye of a typhoon.
The
insurers in this case sought to get compensation from the reinsurance company
and Field J held that Orient Assurance Company had the duty to indemnify
the insurers
b) Risk Distribution in
Reinsurance: How re-insurance help in management of risk
1. Risk
transfer
In
reinsurance, the risk covered by the insurer is
effectively transferred to the reinsurer. The insurer is also therefore
indemnified from the risks accruing thereto.
The
direct insurer accepts the risk to be fully liable to the policy holder, the
direct insurer then transfers the risk to the reinsurance company who then
accepts a share of the ceded risk as a result becomes liable to the cedant.
Everything covered in a reinsurance policy is standard policy meaning the
policy taken as a reinsurance company has to be effectively identical to the
insurer’s policy for it to work. This is because the insuring company needs to
be able to make claim to their clients. Reinsurance companies reinsure some of
the risks exposed under the reinsurance contracts to other reinsurers. That act
is called retrocession. The reinsure under which the risk is transferred to
is called the retrocession .
As
a result, the flow of business and premium is as follows;
Client
--- >Insurer------ >Reinsurer------ >Retrocessionaire
Client----
>Cedant------>Retrocedant---
>Retrocessionaire
In the case of AstraZeneca Insurance
Company Ltd v XL Insurance (Bermuda) Ltd [2]
AstraZeneca
Insurance Company Ltd (AZI) was the captive insurer of the AZ group. The policy
was written on the Bermuda Form but was governed by English law and the
arbitration clause had been waived. AZI was reinsured by XL and ACE. AZI sought
to recover for its reinsurers an indemnity for payments made to AZ in respect
of claims by third parties for injury suffered by reason of the use of an AZ
pharmaceutical product. The losses consisted mainly of defence costs, although
some moneys had been paid by way of settlements. In no case had AZ been found
liable to third party claimants, and the argument put forward by AZI was that
the policy responded where payments were made in respect of alleged legal
liability as opposed to established legal liability. AZ further argued that it
was entitled to defence costs on the same basis. Although the case was
dismissed on several other grounds, the reinsurance company had to pay for the
risk that had been paid to by the insurance company.
2. Issuance
of policies with higher limits
With
reinsurance, the insurer can issue policies with higher limits than
would otherwise be allowed, thus being able to take on more risk because some
of that risk is now transferred to the reinsurer. The reason for this is the
number of insurers that have suffered significant losses and become financially
impaired.
c) TYPES
OF REINSURANCE
There
are two fundamental types of Reinsurance; Treaty Reinsurance and Facultative
Reinsurance.
1. Treaty
Reinsurance
In
this type of reinsurance, the reinsurer accepts a specific level of risk from the
primary insurer. The primary insurer cedes and the reinsurer accepts all risks
that fall within the terms of the agreement. In essence, of fundamental
importance is that the primary insurer and the reinsurer share risks at an
agreed upon level.
Under
this type of insurance, risk-sharing may e determined according to two major
systems.
1.1.
Quota sharing arrangement
In
this system, the primary insurer and the reinsurer share in the premiums and
losses of every policy on a fixed percentage basis.
1.2.
Surplus sharing arrangement
This
arrangement, on the other hand provides for the insurer selecting the amount of
risk at or above a minimum retention level and covers all claims to that level.
The reinsurance company then covers the remainder of the claim and makes
payment up to the predetermined limit. In this case then, premium claims are
not shared proportionally.
This
type of reinsurance can also be divided into various categories according to
how coverage is done.
1.2.1. Risk
Attaching reinsurance
Under
this type of contract, all policy claims that are established during the
effective period of the reinsurance coverage will be covered, regardless of
whether the losses occurred outside the coverage period. Conversely, no
coverage will be given on claims that originate outside the coverage period,
even if the losses occurred while the reinsurance contract is in effect.
1.2.2. Loss-occurring
Coverage
This
is a type of treaty coverage where the insurance company can claim all losses
that occur during the reinsurance contract period. The important factor to
consider is when the losses have occurred and not when the claims have been
made.
2. Facultative
Reinsurance
In
facultative reinsurance, the primary insurer identifies which risks it wants to
cover and which risks are ceded to the insurer. Each policy is offered and
considered on individual risk basis upon individual analysis.
This
type of reinsurance is mostly purchased by insurance companies for individual
risks that are not covered by the reinsurance treaties for any amounts in
excess of the monetary limits of the reinsurance treaties and for uninsured
risks.
Having
explored the two major types of insurance, it is also prudent to look at the
risk allocation policies. There are two ways in which coverage can be allotted
between the parties.
2.1.
Proportional
In
this setup, the reinsured obtains coverage for only a portion or percentage of
the loss or risk from the reinsurer. Proportion of coverage is purely based on
the percentage of premiums paid to the reinsurer.
Under
proportional allocation of risks, only the percentage of loss is covered b the
policy and not the actual amount paid by the reinsured.
2.2.
Non-Proportional
Here,
the reinsurance covers a predetermined figure of amount of loss. So that any
loss exceeding the set out base is paid by the reinsured. The amount paid by
the reinsured has no connection with the premium issued to the primary insurer.
Instead,
the deductible amount can be figured either by each event or in the aggregate
of all the events.
This
type of insurance is mostly associated with covering of catastrophic events for
which it can not be easily ascertained the amount of risk that poses. Other
scholars have classified this as Excess of Loss Insurance because the
reinsurer will only cover the losses that exceed the insurance company’s
retained limit and it can cover the insurance company either on a per
occurrence basis or for all the cumulative losses within a specified period.
REFERENCE
e) FinWeb.
(2008, november 1). reinsurance module 5. Retrieved november 13, 2013,
from finweb: www.finweb.com
f) i-law.
(2013, november 15). i-law. Retrieved november 15, 2013, from i-law:
www.i-law.com
g) J.J.Ogola.
(2007). Business Law. Nairobi.
h) reports,
k. l. (2007). Insurance Act Of Kenya CAP 487. Nairobi: council for ;aw
reporting.
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