7. Reinsurance: Insurance for Insurers
Reinsurance is a contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all of its liabilities. The purpose of reinsurance is to protect insurers against catastrophic losses. The originating company that procures insurance on itself from another insurer is called the ceding insurer (because it cedes, or gives, the risk to the reinsurer). The other insurer is called the assuming insurer, or reinsurer.
When reinsurance is purchased on a specific policy, it is classified as facultative reinsurance. When an insurer has an automatic reinsurance agreement between itself and the reinsurer in which the reinsurer is bound to accept all risks ceded to it, it is classified as a reinsurance treaty. Treaties are usually negotiated for a period of a year or longer.
C. Agents and General Rules of Agency
An agent/producer is an individual licensed to sell, solicit or negotiate insurance contracts on behalf of the principal (insurer). The law of agency defines the relationship between the principal and the agent/producer: the acts of the agent/producer within the scope of authority are deemed to be the acts of the insurer.
In this relationship, it is a given that
- An agent represents the insurer, not the insured;
- Any knowledge of the agent is presumed to be knowledge of the insurer;
- If the agent is working within the conditions of his/her contract, the insurer is fully responsible;
- When the insured submits payment to the agent, it is the same as submitting a payment to the insurer.
The agent is responsible for accurately completing applications for insurance; submitting the application to the insurer for underwriting; and delivering the policy to the policyowner.
1. Authority and Powers of Agents
The agency contract details the authority an agent has within his/her company. Contractually, only those actions for which the agent is authorized can bind the principal (insurer). In reality, an agent's authority is much broader. There are 3 types of agent authority: express, implied, and apparent.
Express
Express authority is the authority a principal intends to grant to an agent by means of the agent’s contract. It is the authority that is written in the contract.
Implied
Implied authority is authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal. Implied authority is incidental to and derives from express authority since not every single detail of an agent’s authority can be spelled out in the written contract.
Example:
If the agency contract does not specifically authorize the agent to collect premiums and remit them to the insurer, but the agent routinely does so in the process of solicitation and delivery of policies, the agent has the implied authority to collect and remit premiums.
Apparent
Apparent authority (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. For example, if an agent uses insurer's stationery when soliciting coverage, an applicant may believe that the agent is authorized to transact insurance on behalf of the insurer.