Insurance vs Reinsurance
Insurance and reinsurance are two complementary methods which come into play at different levels.
What do they have in common?
- Offering financial protection to the contract beneficiaries and as such mitigating the impact of claims triggering the coverage.
- Insurance companies, in return for payment of a premium or contribution, offer an insured party, individual or business company, protection when there is a loss.
- The reinsurer insures the insurer who cedes all or a part of their risk to the reinsurer in return for a premium. The insurer is now insured within the context of the reinsurance contract and is now known as the cedent. Reinsurance therefore cannot exist without primary insurance: it's a case of secondary insurance or 2nd level insurance. The reinsurer themselves can also be reinsured. This is done via retrocession which works in the same way as reinsurance. The reinsurer who is ceding part of their risk within the operation is known as the retrocedent whilst the co-contractor, the cessionary of this portion of the risk, is known as the retro-reinsurer. In this way, the insurer is vertically sharing part of their risk.
- Should a loss occur and be covered by the contract, the role of the insurer is to compensate the insured party; and the role of the reinsurer being to compensate the cedent.
- The initial insured party does not hold any right to nor are they confined by the reinsurance contract. There is no link to the reinsurer. And vice versa, the reinsurer does not have any right to, nor are they obliged by the insurance policies.
What are their differences?
- As agreed amongst professionals within the sector, reinsurance contracts are not subject to the same consumer protection as insurance contracts. In France, insurance contracts are in effect governed by the French Insurance Code whereas reinsurance contracts are subjected to general contract law.
- The premium paid by the cedent to the reinsurer is expressed as a ratio (a percentage) of the cedent’s premium base for the sector or risk involved. On the contrary, insurance premiums are a fixed, predetermined sum.
- The scope is also different. The purpose of an insurance contract is to cover the occurrence of a risk. Reinsurance, however, can be broader: the protection of a group of risks relating to the cedent’s portfolio, or the cedent’s performance. It is in this way that the proportional reinsurance treaties such as quota-share or surplus share act as protection for the cedent’s portfolios whilst the non-proportional treaty or treaties, such as Stop Loss, protect the cedent’s performance.
- Contracts in excess of loss allow the cedent to only transfer the peak claims, in other words the largest claims.
- Reinsurance allows the insurer to share a group of insurance policies and spread their risk.