REINSURANCE--WHAT IS IT?

Reinsurance a/k/a/ Insurance for Insurers, or Stop-loss Insurance-The practice whereby insurers transfer portions of their risk portfolios to other parties by some type of agreement to reduce the possibility of paying a large obligation resulting from an insurance claim.The party that diversifies it's insurance portfolio is known as the ceding party , the party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer .

The parties to the Insurance contract:(1)-The reinsured,(2)-The ceding company,(3)-The primary company.

The legal aspects of Reinsurance :(A)-Reinsurance is a form of insurance ,(B)- Only one carrier is empowered to insure, may reinsure,(C)-The reinsured must also be empowered to insure,(D)-The reinsurance contract is one of indemnity, not "a promise to pay".

Why reinsurance is necessary:(1)-Reinsurance allows insurers to remain solvent by recovering some, or all amounts paid to it's claimants, it also reduces the net liability on individual risks, and catastrophe protection from large multiple losses,the practice also provides ceding companies (those who seek reinsurance),the capability to increase their underwriting capabilities in terms of the number and size of risks.

Reinsurance Advantages:(1)-Allows insurers to underwrite policies covering a larger quantity or volume of risk without excessively raising administrative costs to cover their solvency margins--in addition, reinsurance makes substantial liquid assets available to insurers in case of exceptional losses.IMPORTANT-Insurers are legally required to maintain sufficient reserves to pay all potential claims from issued policies.

Relative Terminology:(a)-Underlying Retention-The net amount of risk or liability arising from an insurance policy that is retained by a company after reinsuring the balance.(b)-Cedent:a party to an insurance contract who passes the financial obligation for certain potential losses to the insurer.(c)-Obligatory Reinsurance: When the ceding insurer agrees to send a reinsurer all policies which fit within the guidelines of the reinsurance agreement.(d)-Cession:The portions of obligations in an insurance company's policy portfolio that are transferred to a reinsurer.(e)-Reinsurance Cedent:That portion of a risk that an insurance company passes to another insurer in order to reduce it's overall risk exposure.

to be continued----