Definition of Reinsurance

1.01 Reinsurance is very much the life blood of the insurance market.1 Various definitions of reinsurance can be found in the reinsurance cases and books. These definitions indicate the same common feature of reinsurance contracts, namely that reinsurance is insurance for insurance companies. For instance in Travelers Casualty & Surety Co of Europe Ltd v Commissioners of Customs and Excise,2 the VAT Tribunal stated that – approving Kiln’s definition3 – reinsurance is insuring insurers.4 The Tribunal also noted that the insurer passes on the risk to another insurer, the reinsurer.5 Reinsurance, therefore, is regarded as a species of insurance.6 As individuals need to protect themselves against the risks to, say, their property and take out insurance policies, insurance companies also need insurance to maintain solvency, especially against big risks. By sharing the risk, insurance companies also enlarge their capacity to insure. Moreover, in some countries only local insurers can insure certain types of risk, and in such cases, insurance companies often need reinsurance to spread the risk and to be able to insure the whole risk in their country. Such local insurers may act as a front for the reinsurers who would take over 100%, or close to it, of the risk reinsured. This also enables reinsurers to do business overseas. Consequently, all of these definitions either complement or support each other and meet the common feature that reinsurance is the transfer of risk from an insurer to another party, the reinsurer.7