1

Outline

Reinsurance: Indemnifying Insurers
for Insurance Losses

PROTECTING POLICYHOLDERS WITH INSURANCE                    3
     Definition of Insurance
     Requirements of an Insurance Plan
       Homogeneity of Exposure Units
       Measurable Loss
       Accidental Loss
       No Catastrophe Risk

PROTECTING INSURANCE COMPANIES WITH REINSURANCE 9
     Definition of Reinsurance
       Unapplicability of Reinsurance
       Relationships Between the Parties
       Eligible Reinsurers: Who May Reinsure Other Insurers
       Purpose of Reinsurance
     Differences from Primary Insurance
     The Reinsurance Contract
       Kinds of Reinsurance
       Classes of Insurance Business Reinsured
       Retrocessions of Reinsurance

REINSURANCE REGULATION AND MARKETS                            20

FUNDAMENTALS OF REINSURANCE
              AND CUSTOMARY PRACTICES                                        22

     Mutual Trust
     Utmost Good Faith
     Following The Fortunes
     Following Settlements Distinguished
     Declaratory Judgments
     Dispute Resolution by Arbitration

SUMMARY                                                                                          28

1

Reinsurance: Indemnifying Insurers
for Insurance Losses *

     Reinsurance is insurance. That may seem an ordinary statement, but the observation is fundamental to an understanding of the nature, purposes, and functions of reinsurance. The point to be made is that any risk or exposure that can be insured can be reinsured, and that any risk or exposure that cannot be insured cannot be reinsured.

     Re, as a prefix in the word reinsurance, indicates an "insuring again" of the exposures already insured by the insurer. After insurance policies are sold by an insurance company (or insurer) and recorded on the books of the company, reinsurance permits an insurer to be insured by the reinsurer for insurance losses, at the option of the insurer. For that matter, with a reinsurance treaty or facultative automatic agreement in place, the reinsurance can become effective at the same time the insurer binds the insurance for the policyholder. The reinsurance may affect only a single policy (as in facultative, see Glossary), multiple policies as in treaty or facultative facilities within a given class of insurance, or the entire classes of insurance. With rare exception, reinsurance is used only by insurers that write insurance for the public.

     It is often said that, as a part of the insurance industry, reinsurance is the insurance that insurance companies buy to protect themselves. The insurance industry is a major contributor to the economy. Approximately 2.65 million persons in the U.S. alone (1% of the population) are employed by all types of insurance organizations. Of the 6,000 insurers within the U.S., one third offer life and health insurance policies and two thirds write property-liability insurance. Essentially each of those insurers needs and uses reinsurance, the type and amount