What is reinsurance?
Reinsurance is insurance used to transfer all or part of the risk assumed by an insurer under one or more insurance contracts to another insurer, and it refers to insurance for insurers. It is a transaction between insurance companies only. An insurance company, called the primary or ceding company, shares portions of its liability with another insurance company, known as a reinsurer. Reinsurance is one of the major risk and capital management tools available to primary insurance companies, and the reinsure agrees to indemnify the insurer against all or part of the loss, which the insurer company may occur under certain policies of insurance that it has issued. In turn, the insurer pays a consideration, typically a premium, and discloses information needed to assess. Price and manage the risk covered by the reinsurance contract.
Shortly, the reinsurer “reimburses” the insurer for its portion of paid claims. The underlying policyholder has no interest or private in the reinsurance contract. The subject matter of a reinsurance contract is the risk the Reinsured undertook in its original policies.
Which principle of insurance are applicable for reinsurance and, which are not, why, or why not?
Most the principle insurance contracts are applies to the reinsurance contract. Since Reinsurance contracts are contracts of indemnity, it applies only to those principle apply to insurance of indemnity. These are Principle of Utmost Good Faith, Principle of Indemnity, Proximate Cause, Insurable Interest, Doctrine of subrogation and Doctrine of Contribution. Some which does not apply to the Risk Must Attach, Mitigation of Loss, and Third Party Interests in Liability Insurance, because these mix some other type of insurance.
Let us see one by one,
Principle of utmost Good Faith
Among the principle of insurance, which are applicable and the heart of reinsurance is the principle of utmost good faith (uberima fidei)
Reason: In applying a notion of utmost good faith to the reinsurance contract, it will be look to those aspects of the parties’ relationship that demand such a duty. Utmost good faith traditionally has mean that there insurer and the ceding insurer would conduct themselves in a manner of trust and full disclosure that led to long relationships. Therefore, the main reason for applying duty of utmost good faith is in cases reinsurance
ü Duty of disclosure
Inherent in the concept of "utmost good faith” is the duty of the ceding insurer to disclose all known information material to the risk.
ü duty to provide notice of claim
Most reinsurance contracts require that prompt notice be given to the reinsurer of any claim subject to
reinsurance. Prompt notice of claims permits there insurer “to reserve properly, to adjust premiums to
reflect the loss experience under the reinsurance contract, and to decide whether to exercise the option of ecoming associated with the ceding insurer in the handling and disposition of the claim.
Most reinsurance contracts require that prompt notice be given to the reinsurer of any claim subject to
reinsurance. Prompt notice of claims permits there insurer “to reserve properly, to adjust premiums to
reflect the loss experience under the reinsurance contract, and to decide whether to exercise the option of ecoming associated with the ceding insurer in the handling and disposition of the claim.
Principle of Indemnity
The principle of indemnity is one of the important principle of insurance that applies to Reinsurance.
Reason: the rationale behind why we applies this principle is that; Reinsurance contracts are contracts of indemnity. It is irrelevant if the original contract is not a contract of indemnity.
ü The general principles regulating contracts of indemnity are applicable to reinsurance policies. Accordingly, the purpose of indemnity is not benefit more than the loss suffered by original insured, rather to restore the policyholder to the financial position they enjoyed immediately before a loss occurred.
ü Reinsurer could not claim under a reinsurance policy until the extent of the loss ascertained. This can only be determined from the outcome of the claim between the insurers and insured.
ü The primary insurer is obligated to and bound by reasonable clause, which made in good faith in respect of legal liability arising from the insurance policy.
Proximate Cause
The principle of proximate cause applies to all classes of insurance including contract of indemnity and, life and personal accident. Accordingly, all contracts are subject to terms and conditions that will exclude certain causes of loss. this principle in cases of reinsurance, only applies to the part of the contract of indemnity by excluding life and personal accident insurance, this due to the fact that reinsurance contract is only applies to contract of indemnity
➢Reason: the main reason we apply this principle is,
ü In the event of a claim, it is important to ascertain the cause of the loss in order to determine if that cause is insured or excluded insurances.
ü To determine whether there is, an insured peril involved; otherwise, the loss is definitely irrecoverable.
ü Reinsurer is liable not liable for all loss, only for those losses, which have been proximately caused by the peril insured against or the nearest, immediate, or the last cause has to be looked into, and if it is the peril insured against, the insured can recover. Reinsurers are not liable for remote causes and remote consequences even if they belong to the category of insured perils.
Doctrine of Subrogation
Principle of Subrogation is an extension and another corollary of the principle of indemnity. This principle is applicable only when the damaged property has any value after the event causing the damage. This means that it applies to all contracts of indemnity.
Reason: principle of subrogation is equally applies to reinsurance agreements since a contract of reinsurance is also a contract of indemnity. Here the important point is, the reinsurer, before paying the money, must make sure that the ‘original insurer has paid the sum originally insured. The reinsurer can benefit out of subrogation rights only to the extent of the amount he has paid to the reinsured as compensation. After paying the money in proportion to the risk transferred to him, a reinsurer becomes entitled to the benefits of subrogation.
Insurable Interest
The concept of insurable interest permeates every aspect of insurance contract irrespective of the type. The nature of insurable interest required however varies from policy to policy. The cardinal principle of insurance law is that every contract of insurance must establish that the reinsured has an insurable interest. Therefore, insurable interest required and applies to the case of reinsurance.
Reason:the primary insurer must be establishes insurable interest in the subject matter of the reinsurance to create a valid reinsurance contract.
ü Lack of insurable interest in the subject matter of the insurance renders the transaction invalid and baseless.
ü It also renders the insurance policy incapable of enforcement. Back of insurance interest renders the transaction speculative and synonymous with gambling. Only the reinsurer has the capacity to raise absence of insurable interest as defense to a claim.
Doctrine of Contribution
Since the principle of contribution and double insurance is only applicable to contracts of indemnity; they shall applies to reinsurance contract.
Reason:Contribution is the right of the reinsurer to invite other reinsurers, with which the reinsured had taken out a policy,
ü To share or contribute to indemnify an insured for the occurrence of a risk that was insured against.
ü To recover the total value of the loss from any of two reinsurers up to the amount of the policy, if person who has double insured a risk has the prerogative .itoccurs where the same subject matter is insured against the same risk with more than one insurer.
The principles that do not apply to reinsurance
ü Mitigation of Loss, This principle does not applies to contract of reinsurance. it is a policy relationship exists between insurer and insured before the loss occurred the duty of the policyholder to take steps to mitigate or minimize the loss as if he were uninsured and must do his best for safeguarding the remaining property. Otherwise, the insurer can avoid the payment for loss attributable to the negligence of the policyholder. The reinsurers only enter into contract to indemnify reinsured, when the reinsured assume larger risk from direct insurance and when the risk exceeds over his retention capacity.
Third Party Interests in Liability Insurance
This principle also does not apply to the case of reinsurance, since contract of reinsurance does not apply employers’ insurance against loss through liability to employees for work related injuries. The injured third party could not bring a direct action against the insurer even after obtaining a judgment against the insured and could not bring on the policy. It does not applies to reinsurance, since it is Liability insurance originated solely as a protection for the interests of the insured against loss suffered through liability to third parties
Legal relationship between the insured and the reinsurer, No legal relationship between the insured and the reinsurer: because ,unless the policy otherwise Provides, reinsurance has effect only between the insurer and the reinsurer and the original insured has no right or interest in respect of reinsurance.Reinsurance has no direct effect for the policyholder.
REFERENCES
credit
1.N. Nolasco, lecturer note at moshi cooperative university
External links
1. https://www.fool.com/knowledge-center/what-is-reinsurance.aspx
2. https://www.thezebra.com/insurance-guide/what-is-reinsurance/
