What Practitioners Need to Know About Reinsurance

Abstract

This article explores the law of reinsurance from Arbitration to the Dodd-Frank Act. The purpose of this article is to provide guidance to general practitioners, corporate counsel, risk managers and insurance professionals on reinsurance. Reinsurance is a contract of indemnity between insurance companies 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 2 basic types of reinsurance, facultative and treaty. A fundamental purpose of reinsurance is to permit an insurer to reduce its reserve requirement. By utilizing reinsurance, an insurer can spread the risk it undertakes over a larger number of policies reducing the amount of reserves required to maintain its business and increase its profitability.

The reinsurance relationship is characterized by the mutual duty of "utmost good faith" and "follow the fortunes." This duty obligates the reinsurer to indemnify the ceding insurer for all losses paid by the ceding insurer on the reinsured policy. Utmost good faith is the guiding principal of reinsurance.

Keywords: Reinsurance, Insurance, Follow the Fortunes, Utmost Good Faith