Functions, Definitions, and Types of Reinsurance

Abstract This chapter provides an overview of reinsurance. The broad purpose of reinsurance is for the direct insurer to be covered in respect of their liability under an original insurance policy, pursuant to which the original insured is entitled to recover from them. The functions of reinsurance, however, are not only protective—there are significant business advantages to be gained by an insurer that can obtain reinsurance. Primarily, reinsurance provides capacity to an insurer, thereby enabling the insurer to insure a volume, type, or size of risk that it would not be able to cover in the absence of reinsurance. In effect, the reinsurer enlarges the direct insurer’s underwriting capacity by accepting a share of the risks and by providing part of the necessary reserves for losses. Reinsurance also increases the capital available to the direct insurer which would otherwise be earmarked to cover potential losses. Reinsurance is essentially a contract under which an insurer agrees to pass a defined part of an insurance risk to a reinsurer. The distinction between the two main types of reinsurance is in the way that this part is defined—proportional or non-proportional.