This is not an area where the insurance intermediary is likely to have a close
association, but he should be aware that reinsurance is very important to the insurer. The
aftermath of the September 11 terrorist attack is a testimony to this saying.
(a) Definition: insurance used to transfer all or part of the risk assumed by an insurer
under one or more insurance contracts to another insurer, who may be referred to
as a reinsurer in relation to such a transaction.
(b) Reasons: The major reason for buying reinsurance is security. It is very likely that
an individual insurance claim is payable from the assets of the insurer, but it may
be very inconvenient (and even costly) to produce large amounts of cash at short
notice, since assets will mostly be in investments. A reinsurance contract may be
so arranged as to entitle the reinsured to an immediate claim payment by the
reinsurer in the event of a valid direct claim (i.e. a claim from the original insured)
exceeding a pre-determined figure, even before the reinsured has actually paid the
direct claim.
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Another important reason for reinsurance is to increase an insurer’s ‘underwriting
capacity’, which means the ability to accept proposed business with in mind all
risk management considerations. Having reinsurance means that some risks may
be accepted which might otherwise have to be declined in part or total.
(c) Methods: This does not concern insurance intermediaries, unless they handle
reinsurance matters on behalf of insurers or reinsurers.
(d) Effects for the Insured: Reinsurance has no direct effect for the policyholder. He
is not entitled to know, and probably has no need to know, that his insurance is
being reinsured. That is a matter entirely between the insurer and the reinsurer(s).
The insurer is always directly liable to the policyholder for the full amount
payable under the contract irrespective of the financial condition of its reinsurers.
Reinsurance, however, does give an added security that the insurer will be able to
pay!