The definition of reinsurance

The use of fronting is an established means of bringing to the London market overseas risks which could not be insured by London market insurers directly. Typically a local insurer insures the risk in its own name and then reinsures anything up to 100% of its liability into Lloyd’s or insurance companies. The assured’s contract remains with the local insurer although, in practice, the settlement of claims by the assured will be controlled by the reinsurers, under a claims control clause in the reinsurance. The insurer will be given some form of commission on the premium to represent its costs and expenses in fronting for the reinsurers. There is no doubt that this type of transaction qualifies as ‘reinsurance’ for the purposes of English law: there is a transfer of risk to the reinsurers in return for premium, and in the event of loss the reinsurers will ultimately have to pay. The reverse situation, in which reinsurers act as a front for local insurers, is more difficult to classify as reinsurance. The facts of Gater Assets Ltd v Nak Naftogaz Ukrainiy [2008] EWHC 237 (Comm) are illustrative of the wide range of transactions that are potentially capable of being described as ‘reinsurance’ even though they are probably no such thing.