Opinion ID: 808087
Heading Depth: 2
Heading Rank: 1

Heading: Reinsurance Basics

Text: A brief reinsurance primer is in order.1 Put colloquially, reinsurance is insurance for insurance companies. A reinsurer agrees to indemnify a reinsured for certain payments the latter makes under one or more of its issued policies. In return, the reinsurer receives a share of the underlying premiums. Ceding a portion of an insured risk prevents a single catastrophic loss from hurling the reinsured into insolvency. It also allows the reinsured to invest more capital or to insure more risks. The reinsured may be either a primary or an excess insurer. Both cover policy holders directly, but excess coverage kicks in only after an insured‘s primary coverage is exhausted. In contrast, reinsurers do not cover policy holders directly.2 Instead, they issue ―certificates‖ of reinsurance to their reinsureds. 1 For a more comprehensive introduction to reinsurance, see Travelers Cas. & Sur. Co. v. Ins. Co. of N. Am., 609 F.3d 143 (3d Cir. 2010); British Ins. Co. of Cayman v. Safety Nat’l Cas., 335 F.3d 205 (3d Cir. 2003); N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995); Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 594 N.E.2d 571 (N.Y. 1992). 2 A reinsurance certificate may contain a so-called ―cut through‖ provision that grants insureds a direct right of action against the reinsurer. See Jurupa Valley Spectrum, LLC v. Nat’l Indem. Co., 555 F.3d 87, 89 (2d Cir. 2009). 5 There are two basic types of reinsurance: treaty and facultative. Under a reinsurance treaty, the reinsurer agrees to accept an entire block of business from the reinsured. Once a treaty is written, a reinsurer is bound to accept all of the policies under the block of business, including those as yet unwritten. Because a treaty reinsurer accepts an entire block of business, it does not assess the individual risks being reinsured; rather, it evaluates the overall risk pool. Facultative reinsurance entails the ceding of a particular risk or policy. Unlike a treaty reinsurer who must accept all covered business, the facultative reinsurer assesses the unique characteristics of each policy to determine whether to reinsure the risk, and at what price. Thus, a facultative reinsurer retains the faculty, or option, to accept or reject any risk. N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1199 (3d Cir. 1995) (internal citations and quotation marks omitted). 6