Gentlemen's Agreement - What Practitioners Should Know About Reinsurance

Abstract

This article is about the insuring of insurance between insurance companies. This process is called REINSURANCE and is finalized by a contract of indemnity defined by a historical relationship. One company, the reinsurer, agrees with another, the cedent, to indemnify it against a loss, which the cedent has assumed under a separate and distinct contract of insurance. There are two basic types of reinsurance, facultative and treaty. A fundamental purpose of reinsurance is to permit an insurance company to reduce its reserve requirement. By reducing the amount of its required reserves an insurance company can increase its profitability. The reinsurance relationship is characterized by the mutual duties of "utmost good faith" and "follow the fortunes. These duties obligate the reinsurer to indemnify the ceding insurer for all losses paid by the ceding insurer on the reinsured policy. In short, reinsurance is a commercial transaction between sophisticated companies governed by equity and utmost good faith.

Keywords: Reinsurance, Insurance of Insurance, Utmost Good faith, Follow the Fortunes