Section 2.8 High-Risk Reinsurance Cessions

• Library: Insurance Practice 2015

Reinsurance adds the third piece to the insolvency puzzle. Reinsurance is a contractual transaction whereby the reinsurer, for consideration, agrees to indemnify the “ceding” or primary insurer against all or part of the loss that the ceding insurer may sustain under policies issued by it. See Robert W. Strain, Reinsurance (Strain Publishing Co. 1980). Reinsurance spreads risk of loss and increases the capacity of insurance companies to underwrite and accept new risks. Id. at 6–7. At the same time, it reduces the amount of money primary insurers must set aside to pay expected claims. Stewart Economics, Inc., Managing Insurance Insolvency, Updating the 1988 Report 15–16 (Aug. 2003) (Stewart Report) suggests creative reinsurance structures are “inviting catastrophe.” See generally Michael A. Knoerzer, Reinsurance, ch. 14, Insurance Law 2003: Understanding the ABCs (course handbook 2003, Practising Law Institute, Item No. 534).

As an over-simplified example, assume the primary insurer does not want to retain 100% of the risk it assumes under malpractice policies of insurance it has issued. For 25% of the premium paid by doctors and hospitals under those policies, a reinsurer agrees to assume 25% of the risk arising under those policies. When the primary insurer pays the claim filed...