How to differentiate between reinsurance and double insurance?
Even if reinsurance often leads to the same risk being shared between several operators, this method is different to double insurance which often happens by accident with the insured party being unaware of it.
What is reinsurance?
Reinsurance can be described in simple terms as being the insurance of the insurers.
It is a transaction by which an insurer cedes, in exchange for payment, all or a part of a risk to a reinsurer who will then compensate the insurer in the event of a claim.
There are two types of reinsurance:
- When the reinsurer’s liability is proportional to that of the insurer, the reinsurer will cover a percentage of the ceded risk: the insurer’s compensation will be calculated up to this percentage.
- When the reinsurer’s liability is non-proportional to that of the insurer, the reinsurer will only intervene beyond the threshold, or priority, defined within the contract.
The relationship between the insured party and the insurer on one hand, and the insured party and the reinsurer on the other hand are distinct:
- Only the insurer is the intermediary of the insured party and is liable towards said party;
- The reinsurer is never in direct contact with the insured party: no contract is set up between the two.
Reinsurance contracts generally benefit from a much more flexible judicial framework than insurance contracts since the reinsurance operations are concluded between informed professionals: it is thus not necessary to provide the same protection mechanisms.
What is double insurance?
With double insurance, the insured party takes out insurance policies covering the same guarantees with different insurers.
Beside comprehensive home insurance policies covering a multitude of risks, the insurers also offer specific insurance policies (education, travel...). Thus, there can be double insurance: the education insurance will overlap the home insurance policy which already covers the children within an educational context.
These overlaps can be problematic since insurance is governed by an important principle: the indemnity principle. The aforementioned principle states that insurance compensation must not exceed the actual loss suffered by the insured party: “the compensation due to the insured party from the insurer cannot exceed the value of the insured item at the time of the loss.”
Yet double insurance allows for two different claims to be made under 2 different covers in the case of a single loss. Should the total compensation exceed the value of the insured item or the loss incurred, the indemnity principle would be violated.
What are the main differences between reinsurance and double insurance?
Reinsurance and double insurance present similarities: they both lead to the distribution of a risk between several operators, in return for payment.
How to differentiate?
- Different risk distribution
With reinsurance, the risk is distributed vertically since it is ceded in two stages: the first stage concerns the insured party/insurer relationship and concludes in an insurance contract. Then the insurer can cede its risk to one or several reinsurer(s) in order to reduce its own exposure in case of a claim.
With double insurance, the risk is distributed horizontally: an insured party will have the same risk insured by different insurers. As such, there is a cover overlap since one same risk is fully insured several times over.
- Different premium payment distribution
The insurer pays the reinsurance premium to the reinsurer in return for the transacted cover. However, with double insurance the insured party will be the sole debtor for the several premiums associated with the multiple insurance policies.
- Different ways of signing up
Reinsurance is never accidental where it is often the case with double insurance. Signing up to reinsurance takes place after negotiations between informed professionals and as such there is often a substantial cost involved, which means it is a well-considered process.
On the other hand, the multiple insurance policies increase the risk of guarantees overlapping. Signing up to specific insurance policies creates a sense of security over the coverage of the risk considered and overcomes any possible doubts about the scope of cover thanks to a comprehensive policy.
As such, where double insurance is of little interest to the insured party, reinsurance can offer a real opportunity for the insurer to modulate the management of its risks.