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HMRC internal manual

General Insurance Manual

Economic basis of insurance: re-insurance and co-insurance

An insurer will often seek to transfer some of the risks it has accepted from policyholders by means of reinsurance. From both an economic and a legal point of view reinsurance is no different from direct insurance in the sense that it involves the transfer of risk under a contractual agreement. It differs from direct insurance only as regards the parties to the contract and takes place when one insurer insures with another insurer a part, or occasionally the whole, of the risks which it has assumed. As each party is financially sophisticated, the regulatory regime is lighter for reinsurance, but some tightening followed implementation of the Reinsurance Directive 2005/68/EC in 2007.

Reinsurance as a concept is not especially complicated but it does have a jargon all of its own. The terms used in reinsurance and the types of reinsurance contracts encountered are explained in GIM8000+ (reinsurance and other forms of risk transfer).

Co-insurance is used to mean different things

  • insurance, usually of large risks, by two or more direct insurers on a joint basis as a means of spreading the risk
  • (particularly in North America) certain types of reinsurance
  • sharing of risk between the insurer and the insured
  • joint insurance, for instance by couples on their home; sometimes this can give rise to difficult questions of whether the policy should be construed as containing separate contracts between insurer and each co-insured, as distinct from a single indivisible contract, and this is one of the topics addressed by the insurance contract law review (see GIM1010).