Basic Concepts — Double Insurance, Re-insurance, Co-insurance and the Insurance Market

3. Basic Concepts — Double Insurance, Re-insurance, Co-insurance and the Insurance Market

Four technical terms recur throughout the study of insurance, and it is important to keep them clearly apart, because students frequently confuse them.

1. Double Insurance. Double insurance arises when the same subject matter is insured by the same insured with two or more insurers, against the same risk, for the same period, where the total sum insured exceeds the value of the subject matter. It is not illegal, and a person is free to take more than one policy on the same property. However, because of the principles of indemnity and contribution (covered later), the insured can never recover more than the actual loss in total — each insurer contributes to the loss in proportion to the sum it has insured, so double insurance can never become a way to make a profit out of a loss. (Note that double insurance in this profit-preventing sense applies to indemnity policies such as fire or marine; a person may validly hold several life policies, since life insurance is not a contract of indemnity.)

2. Re-insurance. Re-insurance is insurance of the insurer. When an insurer accepts a risk that is too large for it to carry comfortably on its own, it passes on a part of that risk to another insurer, called the re-insurer, in return for a share of the premium. The original insurer is called the ceding company; the portion of the risk it keeps is its retention, and the portion it passes on is the cession. Two points are essential: the original insured has no direct relationship with the re-insurer and continues to deal only with the original insurer; and re-insurance allows an insurer to accept very large risks safely by spreading them, which strengthens the whole industry.

3. Co-insurance. Co-insurance arises when a single large risk is shared, from the very beginning, among two or more insurers, each of whom directly covers an agreed proportion of the risk under one arrangement. Usually one of them acts as the leading insurer and handles the policy and claims on behalf of the group, while each insurer is liable only for its own agreed share. The key difference from re-insurance is that in co-insurance the original insurers jointly and directly cover the risk from the outset (the insured knows all of them), whereas in re-insurance one insurer first takes the whole risk and then passes part of it on to a re-insurer with whom the insured has no dealings.

4. Insurance Market. The insurance market is the whole mechanism through which insurance cover is bought and sold — it brings together those who want to transfer risk (the buyers / insured) and those willing to accept risk for a premium (the sellers / insurers). The main participants are:

• Insurers — the companies that accept risks and issue policies, both life insurers and general (non-life) insurers;
• Re-insurers — companies that provide re-insurance to the insurers;
• Intermediaries — the persons who bring buyers and sellers together and service the business, chiefly agents (who represent an insurer), brokers (who represent the insured), and surveyors and loss assessors (who assess claims); and …