Insurance and reinsurance are two closely related phenomena. Providing those wishing insurance services, the company is faced with many risks. If the insured event is recorded, you have to pay considerable financial amounts under the compensation program. The load is so great that for one company to cope with it is often almost impossible. In the most difficult situation are companies offering insurance services as the main, that is, in a permanent format.
There is an exit
The modern approach is the union of several enterprises in order to form a single pool, which is reinsurance. The essence of the phenomenon is as follows: economically complex mutual business relations are created, linking various companies in the field of insurance. If it is easier to formulate a definition, then the phenomenon can be called insurance of a company that provides insurance services to a third client.
Currently, a reinsurance contract is a rather large category of documentation. There is no specific concrete model document that is unified and binding on all enterprises wishing to cooperate according to the described logic. At the same time, the essence of the phenomenon is preserved regardless of the design of the documentation component. The legal entity acting as the primary insurer reimburses a certain amount to the client independently, while other insurance companies cooperate according to a previously concluded agreement and help with the rest. These firms become reinsurers.
A lot of experience
Reinsurance is quite extensively represented in Russia, European powers. Such cooperation is no less relevant for overseas enterprises. Turnovers of financial values involved in this kind of activity are quite substantial in all regions of our planet. For example, annually in America alone, rough estimates show 180 billion, and in European powers - about 120 billion (calculations were made in US dollars as the most convenient currency).
A little less than half - 44% - are reinsurance operations related to property. About 31% is accounted for by transfer of responsibility by arrangement of client's life insurance and health insurance. About 22% are associated with liability insurance programs. But the risks associated with the money supply are no more than three percent of the total volume of transactions of this type.
About terminology and practice
All of the above types of reinsurance operations (liability, property, health, etc.) require the participation of several interested persons. In such a transaction, it is correct to call the reinsurer the person who is liable for reinsurance of possible risks. An insurer that transfers a certain risk to the reinsurer is called an assignor in official terminology. In some cases, the assignor leaves risks on its own balance sheet. The enterprise taking risks upon itself is usually called the assignee.
Interaction Features
A wide variety of forms of reinsurance represented in modern business is explained by the numerous features of this type of business. In particular, it must be remembered that the reinsurer is not required to bear the entire burden of payments related to risks in a specific arrangement.The company can only partially repay the amount, and transfer everything else under a similar reinsurance contract to another legal entity. In such a situation, the reinsurer informs the assignor of its initiative. The notification of the operation must be issued in writing, officially.
Some forms of reinsurance require prior agreement with the assignor of a risk transfer operation. This is due to the fact that the original policyholder is a person directly interested in all aspects of the transaction conducted within its framework.
Important Nuances
Coinsurance and reinsurance are quite dangerous activities that involve numerous risks and strict compliance with the agreement. In order for all parties to be satisfied with the cooperation, it is necessary to adhere to the letter of the agreement signed between all parties. In addition, you must comply with all those rules that are declared by federal law and are mandatory for enterprises providing insurance services. In particular, in the area of responsibility of the reinsurer - regular monthly distribution of the list of risks included in the concluded agreement. The list must be made in writing. Documentation by specialists is called bordero.
Reinsurance is a system of interaction when the reinsurer has the right to a certain percentage of profits secured by an agreement between the end customer and the insurer. This is prescribed in the reinsurance agreement concluded between legal entities. The official name of the amount is a bonus. It can be equated to a commission.
Nuances: many!
Coinsurance and reinsurance are quite complex areas of financial activity. The phenomenon is not only in the economic sector, but also legal, which is caused by a variety of aspects, features of the relationship between enterprises. The main task of the legal department of companies working in this area is to clearly control the activities of the company, observing not only the norms of concluded contracts, but also the restrictions and conditions declared by law.
Reinsurance is such an activity in which an incorrect, inattentive attitude to the lawful standards and rules of the signed contracts causes significant financial losses. You may encounter problems with the law. Especially difficult are some areas of work. For example, reinsurance in space is such a specific thing that it is practically impossible to understand it without a special education (legal, economic), the number of nuances that determine the situation is too great.
How will it work?
In many ways, such a wide variety of types of reinsurance is due to the fact that activities in the services market have been represented for quite some time. There are many model contracts that are actively used by enterprises in different powers, in various sectors of interaction with clients. There are two types of the most current arrangements used today:
- obligatory;
- optional.
Choose one or another type, pre-analyzing aspects of the situation. In some cases, the mixed solution becomes the optimal solution.
General view
The essence of reinsurance during the execution of an optional contract is the transfer by the assignor from its balance sheet to the enterprise entering into work of risks. This method can be safely called the simplest. It is most widely used in insurance practice in various countries. The reinsurer may accept or refuse to accept risks. The indicated category includes a subtype of quota reinsurance, within the framework of which quotas denote such risks that the assignee receives on its balance sheet.
Obligatory reinsurance is the most complex and regulated type of cooperation.At the stage of concluding an agreement, the assignor without fail transfers all risks of the selected category from its balance sheet to the enterprise with which it enters into cooperation. Pre-negotiate financial limits for the transaction. Risks are transferred in strict accordance with this limit. The assignee's obligation is to accept all that is sent to him by the assignor. Such an arrangement is considered the most reliable option, but often it is relatively disadvantageous for someone who takes risks on his balance sheet.
Deserves attention
If in a specific case reinsurance is a joint work, drawn up in accordance with an obligatory type of arrangement, certain protection for both parties is provided by limiting the risks of the amounts. The receiving party assesses its responsibility and only within this amount can ensure the fulfillment of obligations in the event of an insured event.
In the case when the compulsory compensation in financial terms turned out to be greater than the limit that the assignee has set for himself, this legal entity has the right to refuse to accept risks on the balance sheet.
All at once
In a number of cases, the analysis shows that the most beneficial reinsurance is cooperation in concluding an agreement of a mixed type, distinguished by the characteristics of the two described categories. The assignor reserves the right to direct risks to the assignee or not to perform such an operation. The enterprise taking risks to the balance sheet is obliged to conduct operations as part of the agreement.
All these methods differ in both strengths and negative features.
Everything's under control
There are several ways to regulate the interaction of enterprises under the reinsurance program. Most often found in practice:
- civil legal (GP);
- financial legal (FI);
- administrative legal (AP).
And if in more detail?
GP - this is an option when an agreement is concluded between the parties to the transaction, taking into account that individuals are residents of various powers. International law, regulations at the interstate level are the main documents for regulating aspects of such cooperation. If the situation has become controversial, conflicting, you will first have to turn to international standards to identify the right side.
In our country, this form of interaction is much more common when all parties to the transaction are residents of the Russian Federation. To control the operation of enterprises, a special provision has been adopted that regulates the features of insurance services, including reinsurance, within a state. The documentation provides a full description of all possible cases, there are standards that are mandatory for accounting when concluding an agreement by legal entities.
Continuing consideration of the issue
AP - an option for monitoring cooperation in the framework of insurance, reinsurance, when there is a court decision, power orders that are binding. All companies (there are simply no exceptions) are obliged to consider documents in their work and clearly obey orders, otherwise the punishment will be quite difficult - from a large fine to the deprivation of a license to work.
FI - this is such a control technique, which involves adjusting the level of the tax rate in relation to various financial transactions. If it is necessary to influence insurance companies, lawmakers may decide to introduce amendments to the laws, taking into account the current situation and the effect that needs to be achieved by updating the legal framework.
Why is this needed?
Numerous forms of existing options for interaction within the described services sector (including proportional reinsurance) are really important for our society. Largely thanks to such a program, insurance companies can create a sustainable business, reliable, trustworthy.Often, in practice, companies are faced with the inability to pay their own insurance claims to the customer on their own. This may be due to the summation of numerous losses in a particular case. There are times when the number of insured events rises sharply relative to the predicted value. Analysts make forecasts about compensations due for payment for a specific time period, but in reality the figure may be much higher. All such cases are really difficult for enterprises.
Finding himself in any of the situations described, an enterprise that has concluded an insurance contract with a client is unable to cope with its obligations. This, in turn, stimulates a person who considers himself to be fully deceived to seek justice in court. During the proceedings in the court, in addition to the payment, the judge will also decide to compensate for the costs of the proceedings and to pay additional amounts to the victim. Thus, losses will become even greater. The situation as a whole resembles a snowball.
How to be saved?
In order not to be at risk of bankruptcy, it is wise to resort to a reinsurance program. Legally approved procedure allows a certain amount of risks from the balance sheet of one enterprise to transfer to another. If the company that entered into the primary insurance contract, in the event of an insured event, is not able to pay the client the amounts due to him, she simply sends these operations to her partner. Such an opportunity significantly reduces the likelihood of bankruptcy.
If we evaluate the current practice, it will become noticeable that the predominant percentage of companies working in the insurance industry in our country provides services to customers with the so-called “airbag” in the form of a reinsurance contract. There are practically no enterprises whose financial capabilities would cover even major risks without facing a serious threat of bankruptcy. At the same time, statistical studies and certain mathematical calculations show that the probability of encountering the need for payments for high risks is really great.
Dedicated to risks
Reinsurance in practice is most often encountered when objects belong to the number of nuclear power plants and are nuclear reactors. Of the total number of risks, terrorism, sabotage, as well as those related to industry in the field of agriculture, pharmacology, and aviation should be especially mentioned.
If an object operating on nuclear energy suddenly finds itself in an emergency condition, this becomes the cause of large-scale destruction, numerous casualties among the population. To compensate for such a program will have to spend huge amounts. Around the world, it is impossible to find such an enterprise that would agree to insure a company working with nuclear energy, only on its own responsibility. Reinsurance is actually the only way to solve the problem. When forming the insurance pool, each of the participants is protected from bankruptcy even in the event of the most financially unfavorable insurance event.
And what else?
Risks associated with agriculture, aviation, pharmaceuticals are caused by numerous monetary losses in the conduct of these types of businesses. The greatest dangers are associated with pharmacological industrial facilities.
Somewhat less often, companies that try to protect themselves from bankruptcy provoked by an abundance of payments resort to the services of reinsurers. Statistics do not always allow us to accurately predict the development of the case. Even knowing the average values, it is difficult to predict exactly what specific financial losses will be over a given time period.The presence of the assignee allows you to save your reputation, not to let the client down, not to be in a situation where you need to answer before the court for unfulfilled obligations. When concluding agreements, one should keep in mind the division of operations into passive and active. The assignor acts as an active participant in the transaction, the assignee will be passive. Correctly assessing the positions of all cooperating enterprises, you can conclude the correct agreements and get profit through them, providing yourself additional protection.