AN

INTRODUCTION
TO REINSURANCE

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INDEX
▪ Definition and purpose
▪ A few notes on insurance
▪ Insurance and reinsurance contracts
▪ Brief history of reinsurance

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DEFINITION & PURPOSE
▪ Reinsurance: “insurance for insurers”
▪ This is perhaps the briefest, simplest and most understandable definition, despite
the existence of various general (legal, technical, etc.) suggestions.

“Reinsurance is the insurance of the risk borne by the insurer”.

▪ Reinsurance would not be possible without the existence of insurance and,
conversely, insurers could not exist (they would do so very precariously) if it were
not for reinsurers.

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A FEW NOTES ON INSURANCE
▪ The insurance contract
▪ An insurance contract or policy is a contractual relationship between an insurer
and an insured which provides the latter with financial means to compensate a
pecuniary claim or reduce the consequences of personal injury sustained in a
claim.

▪ Risks
▪ In everyday life, people are exposed to an infinite number of risks that may affect
their person or their property. So, in consideration of remuneration calculated in
advance, the insured (an individual or company) transfers those risks to an insurer,
transforming the variable costs of a claim into a fixed cost (the premium).

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A FEW NOTES ON INSURANCE (CONT.)
▪ Insurance as a stabilizing factor
▪ On the basis of the previous point, one can consider insurance to be a factor that can
be used to stabilize the personal or business future in the event of negative financial
consequences which may have been suffered by the insured as a result of possible
adverse events
▪ The insurer’s financial activity
▪ Insurers receive income prior to incurring expenditure: they receive the price of the
insurance, or premium, before providing financial compensation for the loss (claim).
Using this income, they set up a fund which is sufficient to provide compensation
(indemnity) for the risks transferred to them
▪ Premiums
▪ These are calculated in advance, using different mathematical and statistical
techniques. However, the insurers’ liability depends totally on chance, which means
that there can be major deviations from their forecasts, or, in other words, strong
fluctuations in the behavior of the claims experience which do not exempt them from
the contractual liability to indemnify claims.
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INSURANCE & REINSURANCE
CONTRACTS
▪ Applicable legislation
▪ In an insurance contract, one of the parties, the insurer, draws up the document
governing the contractual relationship, i.e. the insurance policy. The other party, the
insured, accepts it and the relationship commences.
▪ This presupposes “technical superiority” on the part of the insurer which, over time,
has led to the need to establish systems for protecting the insured which are governed
by legislation.
▪ But what happens with reinsurance?
▪ Here, the contract is agreed and drawn up between parties that are equally on the
subject, with neither of them having “technical superiority”. Therefore, the
protectionism referred to in respect of the insurance contract is not necessary, and the
contract, like any other commercial contract, will be subject to ordinary law and,
logically, to the governing clauses agreed by the parties.

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INSURANCE & REINSURANCE
CONTRACTS (CONT.)
▪ Risk analysis
▪ “Good faith” is a characteristic of both the insurance and the reinsurance contract, but,
in the latter case, it is particular importance. Why? Because the insurer can analyze each
of the risks it writes and decide on its conditions, whereas the reinsurer does not have
this possibility or does not usually exercise it.
▪ The reinsurer, therefore, has to rely on the accuracy and validity of the information
provided by the insurer, which is usually of a general nature and based on statistics. In
other words, it has to rely on the good management and selection of risks by its
reinsured.

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BRIEF HISTORY OF REINSURANCE
▪ Early Insurances
▪ Even in Greek and Roman times, a type of marine insurance known as “bottomry loans”
existed and was governed by Roman law (Foenus nauticum). This continued up to the
Middle Ages and constituted a fledgling insurance system.
▪ These contracts were used to finance the purchase of commodities that were going to
be transported by sea so that, if the cargo reached its destination safe and sound, the
person financing the voyage received the amount of the loan plus substantial interest.

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BRIEF HISTORY OF REINSURANCE
(CONT.)
▪ The first reinsurance contract
▪ The first known reinsurance contract, written in Latin, was effected in Genoa in July
1370. it concerned a cargo that was to be carried by sea from Cadiz (in Spain) to Sluis (in
Flanders) and was insured. However, because of dangerous nature of the voyage, the
insurer transferred most of the risk to a second insurer, who accepted it. This
represented a true reinsurance between the insurer and reinsurer.
▪ The contract also had two interesting aspects in relation to reinsurance:
▪ Firstly, only the past part of the route was reinsured (not from Genoa to Cadiz, but from Cadiz to
Flanders) due to its particular risk.
▪ The most probable or substantial risk was transferred, a form that is also in general use today.
▪ This reinsurance agreement did not mention the premium that had to be paid, most
probably because of the canon laws against usury that prevailed in Genoa at the time.

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BRIEF HISTORY OF REINSURANCE
(CONT.)
▪ From “rasichurare” to “riassicurare”
▪ We move on to the 15th century, and more specifically to 16 May 1409 in Florence where
a reinsurance contract appears for a shipment of wool worth 200 gold florins from
Southampton to Porto Pisano, in which the term “rasichurare”, equivalent to modern-
day “riassicurare”, appears for the first time. This terms seems to have been adopted by
other European languages to refer to this type of commercial relationship.
▪ Anyway, it was in Renaissance Italy where these written agreements were first drawn up,
due, amongst other things, to the considerable increase in trade between influential
Mediterranean cities, which, in turn, extended their business relations with the
countries of the Orient.

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BRIEF HISTORY OF REINSURANCE
(CONT.)
▪ From “rasichurare” to “riassicurare”
▪ We move on to the 15th century, and more specifically to 16 May 1409 in Florence where
a reinsurance contract appears for a shipment of wool worth 200 gold florins from
Southampton to Porto Pisano, in which the term “rasichurare”, equivalent to modern-
day “riassicurare”, appears for the first time. This terms seems to have been adopted by
other European languages to refer to this type of commercial relationship.
▪ Anyway, it was in Renaissance Italy where these written agreements were first drawn up,
due, amongst other things, to the considerable increase in trade between influential
Mediterranean cities, which, in turn, extended their business relations with the
countries of the Orient.

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