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Chapter

E Contractual relationship between buyers and sellers

Before we consider further the purpose of reinsurance and the reasons for its purchase and sale, it
would be useful here to look briefly at the contractual aspects of reinsurance.
In essence, a reinsurance transaction is an agreement between two parties: the reinsured and the
An agreement
between two parties reinsurer, where the reinsurer agrees to accept a certain fixed share of the reinsured’s risk upon terms
set out in the agreement.

A reinsurance transaction is the buying and selling of contractual promises.

Question 1.5
For its part, what is the reinsured promising to do in a reinsurance contract?

In return for the premium paid by the reinsured, the reinsurer promises to be bound to pay claims if
certain specified events take place. This contract is formed into a written document which is legally
enforceable. The importance of the contract is that it determines how much and when the premium will
be paid, under what circumstances and to what extent a claim will be paid if it occurs, how long the
contract lasts for, and when and how it should end. The reinsured and all the reinsurers, or their
respective agents, will sign and acknowledge the contract each for their own part.
The precise legal technicalities are covered in more detail in chapter 8, but it is helpful here to recognise
that the reinsurance contract and the underlying contract are separate policies and that the original
insured and the reinsurer have no rights or remedies against or to each other. Finally, note that
reinsurance has all the standard requirements of any other contract:

a common reinsurance
offer acceptance consideration
purpose contract

If there is a problem with any of these areas then, potentially, a dispute could arise. Reference copy for CII Face to Face Training

Reinforce
Remind yourself from earlier studies of the formation of a valid contract. Think about how the various requirements
apply to a reinsurance contract.

F Reinsurance brokers

Although not normally an underwriter of risk, the reinsurance broker has a significant effect and
influence on the transaction of reinsurance business, and we must look at the role of the broker in
relation to the buyers and sellers of reinsurance.
To operate, a broker must have two markets available to them: one in which they can acquire business
and one in which they can place the business so acquired. Without these two facilities they cannot
operate.

Reinforce
Before you move on, consider the potential differences in the role of a broker and whether any conflicts of interest
may arise when placing business on behalf of:
• an insured with an insurer; and
• an insurer (reinsured) with a reinsurer.

F1 Legal requirements for brokers

Consider this…
Do you think that a reinsurance broker acts on behalf of the reinsured, or on behalf of the reinsurer?

It is clear in English law that a reinsurance broker acts for the reinsured in negotiating a reinsurance
contract with the reinsurer, an important legal point illustrated in Deeny v. Gooda Walker (1995).