DAY 1: AN INTRODUCTION TO REINSURANCETariq Al-Bashatariqalbasha@outlook.com – 00962 7 9767 7418

INDEX

▪ Definition and purpose

▪ A few notes on insurance

▪ Insurance and reinsurance contracts

▪ Brief history of reinsurance

▪ About Tariq Al-Basha

DEFINITION & PURPOSE

▪ Reinsurance: “insurance for insurers”

▪ This is perhaps the briefest, simplest and most understandable definition, despite the existence of various general (legal, technical, etc.) suggestions.

“Reinsurance is the insurance of the risk borne by the insurer”.

▪ Reinsurance would not be possible without the existence of insurance and, conversely, insurers could not exist (they would do so very precariously) if it were not for reinsurers.

A FEW NOTES ON INSURANCE

▪ The insurance contract

▪ An insurance contract or policy is a contractual relationship between an insurerand an insured which provides the latter with financial means to compensate apecuniary claim or reduce the consequences of personal injury sustained in aclaim.

▪ Risks

▪ In everyday life, people are exposed to an infinite number of risks that may affecttheir person or their property. So, in consideration of remuneration calculated inadvance, the insured (an individual or company) transfers those risks to an insurer,transforming the variable costs of a claim into a fixed cost (the premium).

A FEW NOTES ON INSURANCE (CONT.)

▪ Insurance as a stabilizing factor

▪ On the basis of the previous point, one can consider insurance to be a factor that canbe used to stabilize the personal or business future in the event of negative financialconsequences which may have been suffered by the insured as a result of possibleadverse events

▪ The insurer’s financial activity

▪ Insurers receive income prior to incurring expenditure: they receive the price of theinsurance, or premium, before providing financial compensation for the loss (claim).Using this income, they set up a fund which is sufficient to provide compensation(indemnity) for the risks transferred to them

▪ Premiums

▪ These are calculated in advance, using different mathematical and statisticaltechniques. However, the insurers’ liability depends totally on chance, which meansthat there can be major deviations from their forecasts, or, in other words, strongfluctuations in the behavior of the claims experience which do not exempt them fromthe contractual liability to indemnify claims.

INSURANCE & REINSURANCE CONTRACTS

▪ Applicable legislation

▪ In an insurance contract, one of the parties, the insurer, draws up the documentgoverning the contractual relationship, i.e. the insurance policy. The other party, theinsured, accepts it and the relationship commences.

▪ This presupposes “technical superiority” on the part of the insurer which, over time,has led to the need to establish systems for protecting the insured which are governedby legislation.

▪ But what happens with reinsurance?

▪ Here, the contract is agreed and drawn up between parties that are equally on thesubject, with neither of them having “technical superiority”. Therefore, theprotectionism referred to in respect of the insurance contract is not necessary, and thecontract, like any other commercial contract, will be subject to ordinary law and,logically, to the governing clauses agreed by the parties.

INSURANCE & REINSURANCE CONTRACTS (CONT.)

▪ Risk analysis

▪ “Good faith” is a characteristic of both the insurance and the reinsurance contract, but,in the latter case, it is particular importance. Why? Because the insurer can analyzeeach of the risks it writes and decide on its conditions, whereas the reinsurer does nothave this possibility or does not usually exercise it.

▪ The reinsurer, therefore, has to rely on the accuracy and validity of the informationprovided by the insurer, which is usually of a general nature and based on statistics. Inother words, it has to rely on the good management and selection of risks by itsreinsured.

BRIEF HISTORY OF REINSURANCE

▪ Early Insurances

▪ Even in Greek and Roman times, a type of marine insurance known as “bottomry loans”existed and was governed by Roman law (Foenus nauticum). This continued up to theMiddle Ages and constituted a fledgling insurance system.

▪ These contracts were used to finance the purchase of commodities that were going tobe transported by sea so that, if the cargo reached its destination safe and sound, theperson financing the voyage received the amount of the loan plus substantial interest.

BRIEF HISTORY OF REINSURANCE (CONT.)

▪ The first reinsurance contract

▪ The first known reinsurance contract, written in Latin, was effected in Genoa in July1370. it concerned a cargo that was to be carried by sea from Cadiz (in Spain) to Sluis (inFlanders) and was insured. However, because of dangerous nature of the voyage, theinsurer transferred most of the risk to a second insurer, who accepted it. Thisrepresented a true reinsurance between the insurer and reinsurer.

▪ The contract also had two interesting aspects in relation to reinsurance:

▪ Firstly, only the past part of the route was reinsured (not from Genoa to Cadiz, but from Cadiz toFlanders) due to its particular risk.

▪ The most probable or substantial risk was transferred, a form that is also in general use today.

▪ This reinsurance agreement did not mention the premium that had to be paid, mostprobably because of the canon laws against usury that prevailed in Genoa at the time.

BRIEF HISTORY OF REINSURANCE (CONT.)

▪ From “rasichurare” to “riassicurare”

▪ We move on to the 15th century, and more specifically to 16 May 1409 in Florencewhere a reinsurance contract appears for a shipment of wool worth 200 gold florinsfrom Southampton to Porto Pisano, in which the term “rasichurare”, equivalent tomodern-day “riassicurare”, appears for the first time. This terms seems to have beenadopted by other European languages to refer to this type of commercial relationship.

▪ Anyway, it was in Renaissance Italy where these written agreements were first drawnup, due, amongst other things, to the considerable increase in trade between influentialMediterranean cities, which, in turn, extended their business relations with thecountries of the Orient.

BRIEF HISTORY OF REINSURANCE (CONT.)

▪ From “rasichurare” to “riassicurare”

▪ We move on to the 15th century, and more specifically to 16 May 1409 in Florencewhere a reinsurance contract appears for a shipment of wool worth 200 gold florinsfrom Southampton to Porto Pisano, in which the term “rasichurare”, equivalent tomodern-day “riassicurare”, appears for the first time. This terms seems to have beenadopted by other European languages to refer to this type of commercial relationship.

▪ Anyway, it was in Renaissance Italy where these written agreements were first drawnup, due, amongst other things, to the considerable increase in trade between influentialMediterranean cities, which, in turn, extended their business relations with thecountries of the Orient.

ABOUT TARIQ AL-BASHA• Business & Financial Modelling

Consultant at several consulting firms inthe Middle East.

• Business management graduate from theUniversity of Greenwich, London – UK.