REINSURANCE. Reinsurance is the term used to denote the transaction whereby a person who has insured a risk insures again a part or the whole of that risk with another person. The purpose of reinsurance is to relieve the original insurer from a liability which is too heavy for him to carry. There is no privity of contract between the reinsurer and the original insured, so that the latter could not sue the former to recover any part of a loss, but the insured could recover in respect of a loss against the original insurer up to the full amount of the policy, notwith standing that part of it had been reinsured.
In a reinsurance transaction the company which reinsures is called the ceding company, the accepting company is called the reinsurer, and the transaction itself is termed a cession.
It is not known when reinsurance was first practised, though there is evidence of its existence at least as early as the first half of the 18th century. In the early days of insurance insurers did not, as a rule, insure for greater amounts than they were prepared to keep for themselves, and, even when this rule began to be relaxed, the arrangements whereby they relieved themselves of heavy commitments partook more of the nature of co-insurance than of reinsurance. Under such arrangements the original insured was in contractual relationship with each of the insurers.
However, in marine business reinsurance was known nearly 200 years ago, for in 1746 an act of parliament made it illegal, a prohibition which was not raised until 1864. It is thought by some that the Act of 1746 really prohibited double insurance; i.e., where the insured covered his property twice, but the word used in the act is "reassurance." However this may be, it is certain that the growth of reinsurance in various sections of the business was slow until well into the 19th century, and it is only during the past 3o years or so that it has developed into its present important and widespread position.
Reinsurance may be divided into two main branches :— Facultative (or optional) and Treaty (or automatic or obligatory).
decline. The term facultative is derived from the power of choice, which this method implies. This system of reinsurance is cumber some, as each risk reinsured has to be handled separately. The particulars of the risk are first shown to the reinsurer on a slip, which it initials for the share it is prepared to accept. This is followed by a request note ; i.e., a formal demand issued by the ceding company to the reinsurer for the specified reinsurance. Upon this the reinsurer issues its take note, which is its official acceptance given pending the issue of a reinsurance policy. This last is the final stage in the transaction, and forms the contract between the parties in respect of the risk reinsured.
The facultative system served its purpose at a time when insurance was transacted on a small scale, and when the need for reinsurance cover was neither great nor urgent. But the need arose in course of time for some more efficient method, and this was eventually found in the reinsurance treaty.
This is an advantage to both, since the ceding company knows in advance that it can place the reinsurances and the reinsurer can rely on receiving a regular flow of business under the treaty. It is a condition of all treaties that, as soon as a reinsurance is placed thereunder the reinsurer's liability commences from the same moment as the liability of the ceding company, while the obligation to cede prevents the ceding company placing some of its reinsurances with one reinsurer and some with another, or favouring one at the expense of another. In both these particulars reinsurance by treaty differs from and represents a considerable advance over the older facultative method.