Chapter 10 Reinsurance Definition: Sec. 97.

. A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance. An agreement between two parties, called the reinsured (ceding company) and the reinsurer, respectively whereby the latter agrees to accept a certain fixed share of the formers risk upon terms set out in the agreement. The original insurer, who, having issued a policy to an insured to cover a certain risk, desires to relieve itself of part thereof. It cannot exist without the original insurance coverage. -

There is no privity of contract between original insured and reinsurer. The original insured cannot file an action to recover from the reinsurer even if he has difficulty in recovering from the original insurer.

Original insured may directly sue the reinsurer if the policy contains a stipulation pour autrui in favor of the original insured which is allowed under the second paragraph of Art. 1311 of the New Civil Code.

Distincitions Double-Insurance 1.) insurer remains in such capacity only 2.) there is only one insured 3.) the subject matter is the property insured 4.) same interest is insured 5.) same peril is insured against in separate policies Reinsurance 1.) Insurer becomes an insured in the reinsurance policy 2.) there are two separate insured 3.) subject matter is the liability of the insured 4.) separate interests 5.) different peril are insured against in separate policies

Nature Reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage. The peril insured against is the risk that the insurer will suffer a loss when it will be required to pay the original insured

Parties Original insurer (reinsured, ceding company, direct-writing company) Reinsurer Sec. 100. The original insured has no interest in a contract of insurance

Reinsurance 1.) two separate contracts are involved 2.) liability is fixed in a separate contract between different parties 3.) insured will not shoulder part of the loss contemplated by the reinsurance contract

Co-Insurance 1.) only one contract 2.) the obligation on the part of the insured is fixed by law or in a clause stipulated upon 3.) insured will share in the loss contemplated by the original contract

4.) not mandated by law in marine insurance

4.) provided by law in marine insurance

Functions To absorb those surplus amounts on each risk accepted by the reinsured which go beyond what it can safely retain for its own account Gives insurers the benefit of greater stability resulting from a widespread business. Enables insurers to have a single risk capacity to accommodate policies of large amounts, with knowledge that they can protect themselves against staggering losses by adjusting risks in such a manner as to reduce the probability of serious inroad into their capital and surplus

Kinds Facultative Reinsurance o Optional, case-by-case method used when the ceding company receives an application for insurance o The term facultative is used in insurance contracts merely to define the right of the reinsurer to accept or not to accept participation in the risk insured o But once the share is accepted, the obligation is absolute and the liability assumed thereunder can be discharged by one and only way payment of the share of the losses Automatic Treaty

Involves a prior agreement between the insurer and the reinsurer that the latter is compelled to accept what is being ceded by the insurer It may also be provided that the insurer is compelled to cede a particular type of insurance to the reinsurer. Automatic treaty may be: Quota-share treaty insurer and reinsurer agree to share losses and premiums based on some proportion Surplus-share reinsurer accepts in excess of the ceding companys retention limit up to a maximum amount Excess-of-loss losses in excess of the retention limit are paid by the reinsurer up to some maximum limit. Reinsurance pool org of insurers that underwrites reinsurance on a joint basis.

Insurable Interest The requirement of insurable interest is complied with by the fact that the reinsured has issued the original policy and accepted liability to its original insured.

Duty to communicate

The insurer or ceding company in facultative reinsurance must communicate representations of the original insured and knowledge and information he possesses whether previously or subsequently acquired Duty to communicate not required in a treaty o Reinsurer is compelled to accept what is being ceded o However, the duty of good faith remains in automatic treaty. o The reinsurer is necessarily interested in acquiring general knowledge of the reinsured and the latter must give info that relates to the following: Standing and reputation of the reinsured Experience and quality of its management; General underwriting policy of the reinsured Companys limit of retention and their relationship with the total premium income Different areas from which the business is derived