What is a Reinsurance Agreement? (and its components)

A reinsurance agreement is a legal contract between an insurance company and a reinsurance company that transfers the risk from the insurance company to the reinsurance company, either partly or fully. This transfer of risk takes place through a reinsurance agreement.

A reinsurance agreement can be between two parties or multiple parties. Generally, an insurance company will transfer its risk to multiple reinsurance companies, thereby participating in multiple reinsurance contracts. This, however, is subjective and depends on how large the insurance company is, and the magnitude of its assets.

It is also important to know that a reinsurance agreement is governed by the agreements and contract acts of each country. For instance, if there is a reinsurance agreement between an Indian insurance company and a reinsurance company, the reinsurance agreement will come under the Indian Contract Act, 1872.

Parties to a contract need to study the contents of this act and accordingly enter into a reinsurance agreement. Further, the agreement may also come under other acts of law apart from the Contract Act, and legal counsel should be sought before entering into an agreement.

Let us now discuss some of the most important components of a reinsurance agreement.

What is in a reinsurance agreement?

The most important components of a reinsurance agreement include the following:

• Scope of coverage: The scope and extent of coverage is mentioned here. A reinsurance company will categorically highlight the exact assets that they are willing to cover. For instance, a reinsurance company may only cover the health insurance assets of an insurance company in a particular geographical area.
• Details of assets covered: Asset details are mentioned in detail to avoid any ambiguity. Details mentioned include the type of asset, location of the asset, income earned via the asset, and beyond.
• Payment terms: Here, the premium payment terms are mentioned. The reinsurance company may ask for a monthly, quarterly, half-yearly, or yearly premium from the insurance company. These terms are flexible and depend on the understanding between both parties.
• Type of reinsurance: The kind of reinsurance coverage extended is mentioned here. Reinsurance can be treaty reinsurance or facultative reinsurance.
• Terms of dispute handling: It is possible that a dispute may crop up in the future between parties. Here, the arbitration terms and dispute resolution terms are mentioned in the event of a disagreement.
• Reporting terms: A reinsurance company may ask for timely reports from the insurance company. Further, they may also ask for authorization for on-site visits and other types of auditing measures. These details are mentioned in the reporting terms component of the reinsurance agreement.
• Principles of insurance: All reinsurance components are governed by the principles of insurance. Both parties need to adhere to the principles of insurance.

There may be a variety of other components to a reinsurance agreement, and it completely depends on the parties to the agreement, but the above components are some of the common aspects of a reinsurance agreement.