Reinsurance contract
Introduction
Reinsurance is the method by which an insurer transfers part of the risks it assumes in order to reduce the amount of its possible loss.
According to a classic definition, "reinsurance is the contract signed between two insurers, one called the reinsurer and the other the reinsured, the direct or primary insurer or ceding company. The insured object will be all or part of the contractual responsibilities that the insured has accepted according to the insurance policies it has subscribed; in practice, most reinsurance provides only partial compensation and the reinsured bears part of the losses."
A broader definition is one that indicates that "the reinsurance contract is essentially an independent contract of insurance where the reinsurer undertakes to indemnify the reinsured, in whole or in part, for losses for which the latter is responsible to the insured under the primary insurance contract. Accordingly, it is subject to the general principles and legal rules applicable to liability insurance, such as the principles of maximum good faith, subrogation (if applicable), and the rules related to interest insurable, the existence of risk and that govern the legality of this and the contract in general.
Reinsurance purpose
As Professor Osvaldo Contreras highlights, although the birth of this figure is after insurance, its existence soon became very necessary, which is why today it is considered indispensable, given that, on the one hand, there are certain risks that are too great for only one insurer to assume, and also, because there is the possibility of catastrophic losses occurring or simply accumulating a set of claims to be compensated that exceed the payment capacity of a single insurer. On the other hand, from a technical point of view, this figure allows the risks to be diluted to the maximum, so that each insurer is left with the burden that it manages to assume on its own account.
Therefore, the advantages of reinsurance are given because it allows the principle of division or atomization of risks to be maintained, in addition to generating confidence in the public, since it allows the insurance business to be solid and respectable.