Reinsure

Reinsure (pronounced ree-in-shoor or ree-in-shur)

(1) In insurance, to again insure.

(2) In insurance, to insure under a contract by which a first insurer is relieved of part or all of the risk (on which a policy has already been issued), which devolves upon another insurer.  It’s preferable in this context to use the hyphenated re-insure to distinguish from reinsure (the again of again insuring something.

1745–55: The construct was re- + insure.  The re- prefix was from the Middle English re-, from the circa 1200 Old French re-, from the Latin re- & red- (back; anew; again; against), from the primitive Indo-European wre & wret- (again), a metathetic alteration of wert- (to turn).  It displaced the native English ed- & eft-.  A hyphen is not normally included in words formed using this prefix, except when the absence of a hyphen would (1) make the meaning unclear, (2) when the word with which the prefix is combined begins with a capital letter, (3) when the word with which the is combined with begins with another “re”, (4) when the word with which the prefix is combined with begins with “e”, (5) when the word formed is identical in form to another word in which re- does not have any of the senses listed above.  As late as the early twentieth century, the dieresis was sometimes used instead of a hyphen (eg reemerge) but this is now rare except when demanded for historic authenticity or if there’s an attempt deliberately to affect the archaic.  Re- may (and has) been applied to almost any verb and previously irregular constructions appear regularly in informal use; the exceptions are all forms of be and the modal verbs (can, should etc).  Although it seems certain the origin of the Latin re- is the primitive Indo-European wre & wret- (which has a parallel in Umbrian re-), beyond that it’s uncertain and while it seems always to have conveyed the general sense of "back" or "backwards", there were instances where the precise was unclear and the prolific productivity in Classical Latin tended make things obscure.  Insure was from the mid-fifteenth century insuren, a variant spelling of the late fourteenth century ensuren (to assure, give formal assurance (also the earlier (circa 1400) sense of "make secure, make safe")) from the Anglo-French enseurer & Old French ensurer, probably influenced by Old French asseurer (assure), the construct being en- (make) + seur or sur (safe, secure, undoubted).  The technical meaning in commerce (make safe against loss by payment of premiums; undertake to ensure against loss etc) dates from 1635 and replaced assure in that sense.  Reinsure, reinsured & reinsuring are verbs and reinsurer & reinsurance are nouns; the common noun plural is reinsurances.

Reinsurance

In commerce, reinsurance is a contract of insurance an insurance company buys from a third-party insurance company to (in whole or in part) limit its liability in the event of against the original policy.  In the industry jargon, the company purchasing the reinsurance is called the "ceding company" (or "cedent" or "cedant") while the issuer of the reinsurance policy is the "reinsurer".  Reinsurance can be used for collateral purposes such as a device to conform to regulatory capital requirements or as a form of transfer payment to maximize the possibilities offered by international taxation arrangements purposes but the primary purpose is as risk-management, a form of hedging in what is essentially a high-stakes gambling market.  There are specialised reinsurance companies which, in their insurance operations, do little but reinsurance but many general insurers also operate in the market, their contracts sometimes layered as they reinsure risk they’re previously assumed as reinsurance.

In the industry, there are seven basic flavors of reinsurance:

(1) Facultative coverage: This protects an insurance provider only for an individual, or a specified risk, or contract.  If there are several risks or contracts that needed to be reinsured, each one must be negotiated separately and the reinsurer has all the right to accept or deny a facultative reinsurance proposal.  Facultative reinsurance comprises a significant percentage of reinsurance business and must, by definition, be negotiated individually for each policy reinsured.  Facultative reinsurance is normally purchased by a cedent for risks either not or insufficiently covered by reinsurance treaties, for amounts above contractual thresholds or for unusual risks.    

(2) Reinsurance treaty: A treaty contract is one in effect for a specified period of time, rather than on a per risk, or contract basis.  For the term of the contract, the reinsurer agrees to cover all or a portion of the risks that may be have been incurred by the cedent.  Treaty reinsurance is however just another contract and there’s no defined template; the agreement may obligate the reinsurer to accept reinsurance of all contracts within the scope ("obligatory reinsurance”) or it may allow the insurer to choose which risks it wants to cede, with the reinsurer obligated to accept such risks ("facultative-obligatory reinsurance ((fac oblig)).

(3) Proportional reinsurance: Under this contract, the reinsurer receives a pro-rated share of the premiums of all policies sold by the cedent, the corollary being that when claims are made, the reinsurer bears a pro-rata portion of the losses.  The two pro-rata calculations need not be the same; that a function of agreement by contract but, in proportional reinsurance, the reinsurer will also reimburse the cedent for defined administrative costs such as processing, business acquisition and writing costs.  The industry jargon for this is “ceding commission” and the payment of costs can be front-loaded (ie paid up-front).  Technically, it’s a kind of agency arrangement best thought of as out-sourcing.

(4) Non-proportional reinsurance: Non-proportional reinsurance, also known as “threshold policies”, permit claims against the policy to be invoked only if the cedent’s losses exceed a specified amount (which can be defined in the relevant currency or as a percentage) which is referred to as the priority or retention limit.  Operating something like excess in domestic insurance, it means the does not have a proportional share in the premiums and losses of cedent and the priority or retention limit may be based on a single type of risk or an entire business category; this is a matter of contractual agreement.

(5) Excess-of-Loss (EoL) reinsurance: This is a specialised variation of non-proportional coverage, again the reinsurer covering only losses exceeding the cedent’s retained limit but EoLs are used almost exclusively in large-scale, high-value contracts associated with the coverage of catastrophic events.  The contracts can cover cedent either on a per occurrence basis or for all the cumulative losses within a specified term.

(6) Risk-attaching reinsurance: Here, all claims established during the define term of the reinsurance will be covered, regardless of whether the losses occurred outside the coverage period whereas no coverage will extend to claims which originate outside the coverage period, even if the losses occurred while the reinsurance contract is in effect.  These contracts are executed generally in specific industries where circumstances differ from the commercial mainstream.

(7) Loss-occurring coverage: A kind of brute-force coverage where the cedent can claim against all losses that occur during the term of the reinsurance contract, the essential aspect being when the event causing the loss have occurred, not when the claim has been booked.

Bismarck and the Reinsurance Treaty

Although in force barely three years between 1887-1890, the Reinsurance Treaty, a secret protocol between the German and Russian Empires, was an important landmark in European diplomatic history, partly because of the part it played in the intricate structure of alliances and agreements maintained by the German Chancellor Otto von Bismarck (1815–1898; Chancellor of the German Empire 1871-1890) but mostly because of the significance of the circumstances in which it lapsed and the events which followed.

A typically precise Bismarkian construct, the treaty required both parties to remain neutral were the other to become involved in a war with a third great power, but stipulated that term would not apply (1) if Germany attacked France or (2) if Russia attacked Austria-Hungary.  Under the treaty, Germany acknowledged Bulgaria and Eastern Rumelia as part of the Russian sphere of influence and agreed to support Russia in (essentially any) actions it might take against the Ottoman Empire to secure or extend hegemony in the Black Sea, the Bosporus and the Dardanelles, the straits leading to the Mediterranean.  The treaty had its origins in the sundering in 1887 of the earlier tripartite German-Austro-Hungarian-Russian (Dreikaiserbund (League of the Three Emperors)) which had had to lapse because Vienna and St Petersburg were both anxious to extend their spheres of interests in the Balkans as the Ottoman Empire declined and needed to keep options open.

Otto von Bismark.

Bismarck interlocking system of alliances was designed to preserve peace in Europe and the spectre of a competition between Russia and Austria–Hungary to carve up the Ottoman spoils in the Balkans, thus the attraction of the reinsurance treaty to forestall the risk of an alliance between St Petersburg and Paris.  Ever since the Franco-Prussian war, the cornerstone of Bismarck’s foreign policy had been the diplomatic isolation of France, his nightmare being hostile states to the west and east, a dynamic in Germany political thought which would last generations.  It certainly wasn’t true he believed (as he was reputed to have said), that the Balkans weren’t worth the death on one German soldier and that he never bothered reading the mailbag from Constantinople, but he did think it infinitely preferable to manage what should be low-intensity conflicts there than the threat of fighting a war on two fronts against France and Russia.  Thus the Reinsurance Treaty which, strictly speaking, didn’t contradict the alliance between the German and Austro-Hungarian empires, the neutrality clauses not applying if Germany attacked France or Russia attacked Austria-Hungary.

Kaiser Wilhelm II in uniform as an Admiral of the Fleet in the British Royal Navy (circa 1896), oil on canvas (believed to be painted from a photograph), by Rudolph Wimmer (1849-1915).

However, Bismarck’s system was much dependent on his skills and sense of the possible.  Once Kaiser Wilhelm II (1859–1941; German Emperor (Kaiser) and King of Prussia 1888-1918) dismissed Bismarck in 1890, German foreign policy fell into the hands of a sovereign who viewed the European map as a matter to be discussed between kings and Bismarck's successor as Chancellor, Leo von Caprivi (1831–1899; Chancellor of the German Empire 1890-1894) was inexperienced in such matters.  Indeed it was von Caprivi who, showing a punctiliousness towards treaties one of his successors wouldn’t choose to adopt, took seriously the contradictions with some existing arrangements the Reinsurance Treaty at least implied and declined the Russian request in 1890 for a renewal.  From that point were unleashed the forces which would see Russian and France drawn together while Germany strengthened its ties to Austria-Hungry and the Ottomans while simultaneously seeking to compete with Britain as a naval power, a threat which would see Britain and France set aside centuries of enmity to conclude anti-German arrangements.  While the path from the end of the Reinsurance Treaty to the outbreak of the First World War in 1914 wasn’t either inevitable or lineal, it’s not that crooked.

Reinsurance recommended: Lindsay Lohan in Esurance Sorta Mom advertisement for Esurance Insurance (an Allstate company).