Reinsurance Law Definition
Reinsurance is essentially “insurance for insurance companies.” It is a contractual arrangement whereby one insurer (the ceding insurer) transfers all or a portion of the risks it underwrites pursuant to a policy or a group of policies to another insurer (the reinsurer). The availability of reinsurance enables an insurer to accept risks that would otherwise be beyond its underwriting capacity by allowing the ceding insurer to “reinsure” a portion of the risk of loss. Reinsurance is a mechanism that enables insurers to spread the risk of catastrophic losses among a larger pool of insurers.
Reinsurance is generally available on a “pro rata” or proportional basis, or on an “excess of loss” basis. A pro rata reinsurance contract obligates the reinsurer to indemnify the ceding insurer for a percentage of any losses from the original risk in return for a corresponding portion of the premium for the original risk. Pro rata reinsurance arrangements generally require the reinsurer to pay a proportion of any losses that occur with no retention (a portion of the risk that the ceding insurer “retains” for its own account). Excess of loss reinsurance indemnifies the ceding insurer for all or a stated portion of loss in excess of a stated retention.
Reinsurance contracts are typically written on either a “treaty” or “facultative” basis. Both can be written as pro rata or excess of loss. Treaty reinsurance provides coverage for specified business (e.g. casualty or workers compensation). The treaty protects the ceding insurer’s entire “book” of policies for the specified business. Facultative reinsurance is designed to protect an individual policy or risk written by the ceding insurer. Both treaty and facultative reinsurance is commonly provided by a number of reinsurers, each agreeing to assume a portion of the reinsured liability.
Attorneys who practice reinsurance law are involved in the negotiation and drafting of reinsurance contracts and in the resolution of disputes between ceding insurers and their reinsurers. Disagreements may arise over whether a particular risk or claim is covered by the reinsurance contract or how a large number of claims settlements are “allocated” among the ceding insurers policies. Administrative disputes involving underwriting practices, claims handling, access to records, and audit rights are not uncommon. Many reinsurance contracts call for disputes to be resolved through binding arbitration before a panel of current or former officers or directors of insurance or reinsurance companies.