Reinsurance

• Reinsurance is essentially insurance for insurance companies. A contract is made between an insurance company and a third party. The third party protects the insurance company from losses. An insurance company suffers losses when it pays out a claim on its original contract. There are two mains types of reinsurance: facultative and treaty coverage.
  
  

Facultative Reinsurance

• Facultative reinsurance is coverage issued for indemnity purposes. This means the third-party coverage is not triggered until the insurance company experiences a loss. When an insurance company applies for facultative reinsurance coverage, the reinsurer evaluates the original insurance company's policies to determine whether to accept the risk for each specific policy. Facultative reinsurers might also choose whether to provide partial or complete coverage for any individual policy. Treaty reinsurance differs in that it covers a class of insurance policies and serves as a more general type of coverage.
  
  

Claim Recovery

• When an insurance company does not have enough funds to pay out on an original policy, the facultative reinsurer steps in to pay the difference. The money the original insurance company pays is the claim amount to the original insured party. The insurance company must file a claim with the reinsurance company for recovery, if required. It is important for insurance companies to work with reinsurers to fairly allocate losses and handle the claim so the reinsurer pays without disagreement.
  
  

Insurance Company Behavior

• Insurance companies must engage with reinsurance companies in the same ethical manner they expect from their own clients. An insurance company must not withhold information on a specific policy. It must make an honest effort and use integrity when negotiating settlements with the original insured. Failure to act in this manner could cause the reinsurance company to deny the insurance company's claim.