Can you imagine that someone was pending to give you back the trust you put in your children every time a hooligan was lost? So, very similarly, is how reinsurance works. An entity called reinsurer assumes part of the risk that each insurer signs in its contracts. In this way, the possible contingencies that can cause a loss or problem to an insurance – its negative effects – are distributed among several entities causing nobody or anything to be exposed in a unique way to the dangers that the insured can generate. For example, it is interesting for an elite athlete or to carry out dangerous activities to distribute their risks through reinsurance for the greatest risk and insured capital.
The reinsurance figure not only provides confidence and support to insurers , but its existence is also vital for the insured or insured himself. If reinsurance did not exist, if that guarantee on which the peace of mind for both parties is based, these would be much more expensive and difficult for the client to assume. That is, the higher the reinsurance, the insurer may cover higher volume risks.
Why we all win with reinsurance
With reinsurance we all have advantages: the reinsurers themselves gain by finding a market and business niche, the insurers earn by being able to offer more attractive and safe products with more advantageous conditions and the insured win because their insurances have a better impact on the clauses that they protect them, wider and richer and less so on their pocket.
Our contingencies are covered by insurance companies that can cope with major contingencies as long as they rely on the mattress offered by the reinsurer, which causes them not to take risks alone. It is a formula perhaps more unknown here in Spain than in other territories where it is very common and a well-known tool. Reinsurance has been working perfectly in countries such as Germany, the United Kingdom, Switzerland or France for many years.
Types of reinsurance
In fact, reinsurance can be of several types depending on its obligation:
- Mandatory: when the risks assumed are established in a contract
- Optional: when there is no reinsurance contract and the risks are communicated individually.
- Mandatory-optional: when the contract is mixed, that is, optional for one of the parties (reinsured) and mandatory for the other (reinsurer),
They can also be classified depending on their content, based on risk:
- Share-share : when the reinsurer participates in a fixed percentage of all the risks established in the contract.
- Surplus: When this percentage of participation is variable according to risk
- Excess loss: when the reinsurer participates in those claims that exceed a pre-established amount or excess claims when a maximum percentage of total loss is set.
How reinsurance, rights and obligations are legislated
Articles 77, 78 and 79 of Law 50/1980 , of October 8, on the Insurance Contract legislates and explains what reinsurance is.
In the first place, it is defined “By the reinsurance contract the reinsurer is obliged to repair, within the limits established in the Law and in the contract, the debt that is born in the reinsurance’s equity as a result of the obligation assumed by the latter as the insurer in an insurance contract. ”
It also marks the benefits for the insured and their rights : “The internal reinsurance pact, made between the direct insurer and other insurers, will not affect the insured, who may, in any case, demand the entire compensation from said insurer, without prejudice to the right of repetition that corresponds to the reinsurers, under the internal agreement ”.
But also its obligations as far as they cannot demand compensation or benefit directly from the company with which it has been reinsured, and how it is protected in case of liquidation (voluntary or forced), of the reinsured, over which “they will enjoy special privilege over the credit balance that throws the insurer’s account with the reinsurer ”. In short, an internal contract between insurers, which reduces risks without prejudice to the rights and benefits of the insured.