Reinsurance can simply be defined as an agreement between an insurance company and a third party. This is more like the general insurance agreement between a person and an insurance company. Reinsurance protects the insurance company from losses since some of the policies have a high chance of incuring huge losses.
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The main reason behind reinsurance is to cover the insurance company, when making huge reimbursements as well as preventing it from losses. Reinsurance is also seen as a risk transfer mechanism (Mathew, 2003).
Reinsurance agreements may be classified into two types, a facultative and a treaty agreement. “Facultative reinsurance policy is used by the reinsured to reduce the chance of loss” associated with a particular agreement and helps in ensuring the risks relating to a particular cover are low (Reinsurance, 2005, par. 5).
It usually covers the whole or part of the given policy and is based on the analysis of the situation and the clauses in the policy. A treaty reinsurance agreement refers to an agreement where a reinsurance company insures various policies related to a class of policies. A treaty agreement is more general than facultative. There are several types of treaty reinsurance agreements, Quota share treaty, excess loss treaty, and surplus treaty.
Wollan (2002) observed that the doctrine of utmost good faith was essential in any insurance transaction or undertaking. The principle of utmost good faith states that an insured person or the insurance company should provide all the details relating to a certain cover that is to be undertaken. One should disclose all the information referred to a particular party or risk. In the case of a reinsurance agreement, both parties should deal with honesty. Both sides should disclose all the information that is deemed necessary for the reimbursement to take place.
Dishonesty occurs when one of the people fails to disclose all the information that is material in the agreement. The insurance company should ensure a good conclusion is reached at when negotiations between the policy holder and the insurance company take place after the occurrence of a loss.
There are cases where the reinsured does not negotiate with the policy holder, hence the reinsurance company will fail to honor the agreement. The reinsured also files a claim with the insurer within time. By this time, the reinsured should have carried out investigations to find out if the claim by the original policyholder was genuine. Dishonesty thus results from failure to adhere to the above.
A surety bond ensures the completion of a contract. The Legal Dictionary (n.d.) defines a surety bond as a written promise under seal which commits its issuer (the “surety”) to pay a named beneficiary, called the oblige, a sum up to a stipulated amount, but subject to the provision that the obligation of the issuer will cease if certain specified conditions are met. (par. 6).
In an insurance undertaking, obliges may at times fail to disclose all the relevant information; this results to obliges not being reimbursed. Such a case does not violate a surety bond, and the principal cannot be sued.
Renewable insurance policies are the ones that offer renewable guarantee over time. For example, consider the case of life insurance policies. Originally, these policies were not renewable over time, and when a person suffered from some chronical desease, the person could not be covered. However, the case of renewability feature allows one to renew a contract over a given period of time and convenient.
Mathew H. (2003). For the Defense 45. The Role of Reinsurance: Defending under the Follow-the-Fortunes Doctrine, 2(45), 12.
Legal Dictionary. (n.d.). Duhaime.org Law Dictionary and Legal Information. Retrieved from http://www.duhaime.org/LegalDictionary/S/SuretyBond.aspx
Reinsurance. (2005). In West’s Encyclopedia of American Law. Retrieved from: https://www.encyclopedia.com/law/encyclopedias-almanacs-transcripts-and-maps/reinsurance
Wollan, E. (2002). Handbook of Reinsurance Law. New York: Aspen Law & Business.