The nature of the reinsurance contract

Abstract

'Reinsurance' not only protects the insured against accumulation hazards, but it also provides redress of losses at a time when the insurer's reserves are as yet low. Moreover reinsurance enables the insurer to diversify his business not solely in terms of the spectrum of classes of direct insurance he may write, but perhaps in terms of geographical spread as well. All this is conducive to more leveling off of peaks and thus to more homogeneity. From a commercial point of view the insurer, through reinsurance, passes on that part of the risk which exceeds his financial capabilities or which can upset the balance of his portfolio. In the absence of reinsurance he would have no alternative but to decline business offers thus restraining growth. However whilst reinsurance provides the insurer with the opportunity to develop his insurance business generally in a flexible manner and within pre-agreed parameters, measures of control are necessarily built in the reinsurance agreement to ensure a healthy expansion of the direct portfolio account in the interest of both the reinsurer and the reinsured. Naturally this will very much depend on the type and the content of the reinsurance contract entered into between these parties. As it is expected the insurance market utilises technical terminology in the transaction of reinsurance business. A glossary of terms which are commonly encountered in reinsurance contracts is found in Appendix I.