Insurance and reinsurance contracts had their origin in Marine transportation activities, way back in the XIV century. Initially, the Insurer would transfer a certain portion of a given risk to some other party, thus fractionating possible losses, with such operation determining that the reinsurance would then be characterized as just another type of insurance contract. Such a conceptualization, thus conceived and disseminated, does not keep the whole truth, as the reinsurance encompasses several other functions.
A typical reinsurance contract is not just intended to transfer or assign part of the risk insured by one Insurer to Reinsurers. It also involves some other functions constructed over the centuries, according to the evolution experienced by this particular system of concentrated pulverization of risks and interests.
Certain trips were only insured, in fact, should a reinsurance contract be available for its most hazardous portion, i.e., from a point of origin to a given port – an insurance contract would be established and, from that port to another port – with reinsurance coverage. Such sharing model does not configure, in itself, a mere parcelling of liabilities over one single risk. In other words, it presents and operates other equally differentiated situations and interests.
In the XVII and XVIII centuries the first judicial sentences have been sculpted about reinsurance, highlighting the independent nature of this contract, both from a legal and an economical perspective.
The development of European societies has dictated the need for organizing reinsurance companies, not only for the Marine risks, but also for the urgent demand of fire insurers. In 1846, the first independent reinsurers – Kölnishe Rückversicherungs–Gesellschaft – obtained the necessary permit to operate in Germany, with the first reinsurance contract being entered into by that company in 1852. The Swiss Reinsurance Company was established in Zurich, in 1863; and the Münchener Rückversicherungsgesellschaft in 1880, in Germany. Lloyd’s underwriter, which also operates with reinsurance, was constituted in London as early as 1688. In the USA, reinsurance companies started to be organized just before the end of the year 1900.
As of the growing evolution of the insurance markets in the world, along the timeline, even modifying risk conditions and economic interests, the Ceding Insurers were forced to retain part of the risks. The function related to the portfolio homogeneity of the Insurer, through a reinsurance operation, was certainly aggregated at much more modern times. The uncontrolled widespread of the productive system created disparate risks, not always properly conducted toward the same parameter, for which reason Insurers have had to limit their losses. The Insurers have to homogenize their results, eliminating the volatility they are absorbing from their insured customers. Upon absorbing such Insurer volatility, Reinsurers are, in turn, capable of homogenizing their portfolios by combining a certain number of portfolios comparable to each other and particularly in view of the internationality of their operations. Two or more catastrophic events would hardly occur within the same period and in one single place, let alone the possibility of occurring at the same time the world over, although, on a probabilistic basis, this could happen under certain conditions (pandemic diseases, for example).
In many countries, the insurance industry and, more specifically, Reinsurers are being faced with new impact scenarios not caused by natural catastrophes. Terrorist attacks, anthropic climatic changes and also financial market crises have all been disturbing societies and their institutions. Such a problematic constitutes new challenges for the insurance and reinsurance industry. At present, one should imagine what was previously unimaginable, in the search for more remote loss events scenarios. The due appraisal of risks, the adjustment of coverages and prices, in addition to establishing adequate underwriting controls and policies, are the essential requirements at a time when a sustainable corporate planning is being required with a view into a medium- and long-term future.
In view of such new scenarios, always in evolution, the reinsurance acquired the modernity status of a financial product, to the extent of allowing Insurers to be more capable of underwriting risks, increasing the offer of insurance products and reducing capital costs. It then propitiates the guaranteed financial strength of the system, for stabilizing direct insurance markets and other intermediary entities, as well as institutional investors.
A reinsurance operation is international by excellence, to the extent of being healthy for local markets to have their liabilities spread over different countries, thus diluting claimed losses, particularly those of a catastrophic nature.
In a very brief manner, and consolidating the whole theory described in the previous paragraphs, the chief function of a reinsurance agreement (treaty) is to guarantee the indemnity to the Insurer resulting from a claim. All other underlying functions will be subject to changes over the time and according to the interests and even requirements of each insurance market. And, for being dynamic, it will then require constant adaptations of all those integrating the system.