Reinsurance refers to the system of insurance relations between insurers, which are based on concluded insurance contracts with policyholders.
Carrying out the insurance business, the insurer accepts insurance objects for insurance and is liable to the policyholder for timely and full coverage for all agreed and accepted insurance risks. Working cash held by the insurer ensures the fulfillment of the contractual obligations of the insurer to the insured. An insurer who has taken major insurance risks from the insured is allowed to insure his entrepreneurial risk with the reinsurer (another insurer) so that he will not be left without money when fulfilling his obligations.
In accordance with Article 13 of the Federal Law of the Russian Federation “On the organization of insurance business in the Russian Federation”, Letter No. 24–00 / KP-52 of the Ministry of Finance of the Russian Federation “On reinsurance contracts”, an insurer entering into a reinsurance contract with a reinsurer himself becomes an insurer (reinsurer). At the same time, the reinsurer by another insurer insures the fully (partially) accepted risk of payment of the sum insured or insurance compensation. Reinsurance enables the insurer to accept the risks of policyholders, which for one insurance company would be large enough.
The legislation of the Russian Federation calls reinsurance a commercial activity in which one insurer (reinsurer) protects the property interests of another insurer (reinsurer) associated with the adoption of the latter under the main contract (insurance contract) of insurance claims.
Reinsurance is also called insurance of insurers or “secondary” insurance. Currently reinsurance is an international type of insurance activity. Today, the insurance market successfully operates groups of insurance companies that specialize only in reinsurance operations and are called reinsurers.
According to Article 967 of the Civil Code of the Russian Federation, reinsurance is performed on the basis of a reinsurance agreement between the insurer and the reinsurer. The reinsurance contract refers to the type of property insurance contracts, which detail insurance objects, especially the persons participating in the reinsurance contract, as well as possible insurance risks.
In addition to a reinsurance agreement, insurance participants can use other regulatory documents used in the business turnover of insurance companies as a confirmation of a commercial agreement.
The subject of a reinsurance contract is the obligation of the reinsurer in case of insolvency of the reinsurer to pay insurance indemnity under a specific insurance contract.
Only insurers are entitled to enter into reinsurance agreements with each other. The legislation of the Russian Federation allows the conclusion of several consecutive contracts. If the terms of the reinsurance agreement do not provide for other conditions, then in accordance with the Civil Code of the Russian Federation (Chapter 48, Articles 929, 933), the rules apply to the insurance contract, which apply to business risk insurance. A legal entity that has the status of an insurer under a main contract (insurance contract) under the reinsurance contract goes into the category of policyholders (part 2 of article 967 of the Civil Code of the Russian Federation).
For reinsurance, there are a huge number of methods and forms. As a rule, the transfer of insurance risk from the insured to the reinsurer is of two forms: obligatory and optional reinsurance. In the obligatory form, each contract from the complex (portfolio) of contracts of a certain type is subject to reinsurance. Obligatory reinsurance, in turn, is divided into proportional and disproportionate reinsurance.
In the optional insurance form, reinsurance is for only one specific insurance contract.
What is not reinsured?
The federal legislation of the Russian Federation establishes some restrictions that must be complied with when concluding a reinsurance contract:
- the reinsurance is not subject to the risk of payment of insurance compensation (insurance amount) under a personal insurance agreement (life insurance), namely, the survival of the insured person to a certain age, or other events;
- Each reinsurer has its own licensed type of activity, therefore, insurers holding licenses for personal insurance cannot reinsure the insurance risks associated with property insurance.
Termination of an agreement
As well as the insurance contract, the reinsurance contract is terminated (changed) in accordance with the provisions of Chapter 29 of the Civil Code of the Russian Federation in the following cases:
- by mutual agreement of the parties, unless otherwise provided by the reinsurance contract or legislation (article 450 part 1 of the Civil Code of the Russian Federation);
at the request of one of the parties, termination (or amendment) of the contract by a court decision (only in case of a significant violation of contractual relations or in other cases).