GIM1160 - Economic basis of insurance: re-insurance and co- insurance

An insurer will often seek to transfer some of the risks it has accepted from policyholders, by means of reinsurance. From both an economic and a legal point of view reinsurance is no different from direct insurance in the sense that it involves the transfer of risk under a contractual agreement. It differs from direct insurance only as regards the parties to the contract and takes place when one insurer insures with another insurer a part, or occasionally the whole, of the risks which it has assumed.

Reinsurance as a concept is not especially complicated but it does have a jargon all of its own which needs to be explained. The terms used in reinsurance and the types of reinsurance contracts encountered are explained in GIM8000+ (Reinsurance and other forms of risk transfer).

Another type of insurance that may be encountered is co-insurance which is the insurance, usually of large risks, by two or more direct insurers on a joint basis as a means of spreading the risk. The term is also used in North America to describe certain types of reinsurance.