A Study On The Legal Issues Of Reinsurance

Resulting from the original insurer's needs for transferring risks,reinsurance industry plays a vital role in the insurance system.Driven by the economic globalization,each country around the world is witnessing the increasing integration of insurance and reinsurance market.The reinsurers in developed countries always play a dominate role in international reinsurance market.The parties involved in foreign reinsurance disputes usually choose the countries which have developed reinsurance markets,and resort to litigation or arbitration to determine whether the reinsurer should compensate the original insurer and compensation scope.Those countries with well-established reinsurance industry,especially common law countries,have accumulated mass and rich experience in legal practice of reinsurance.China's domestic insurance market has heavily reliance on the intentional reinsurance market and the total reinsurance market size is relatively small,in which cedes reinsurance being the dominant form.Domestic demand for reinsurance is mainly supplied by foreign reinsurer.Due to the underdeveloped reinsurance market and intermediary market,together with the lagging legislation and research on reinsurance theory,a small quantity of foreign-related reinsurance cases are handled by the court in our country.The core of the hot debate regarding the reinsurance trading and legislation is how to determine the compensation liability of the reinsurer.Though domestic researches on reinsurance laws cover a large deal of aspects,the core problem has not received enough attention because of the lack of related cases in reinsurance legal practice.Therefore,this thesis focuses on how to determine the compensation liability of reinsurer and centers around the several legal problems key to settle reinsurance disputes,from the perspective of the relationship between original insurance and reinsurance.Having original insurance as its basis,the reinsurer indemnify the original insurer against the insurance claims only when underwriting conditions are consistent with payment conditions and the original insurer has performed its compensation obligation.In practice,the expectations of the original insurer to recover from the reinsurer usually contradict the interests of the reinsurer who will try to defend against the payment claims from the original insurer.The higher payment the original insurer recovers,the less profit the reinsurer earn.The commercial profits of both sides are negatively correlated.The essence of the disputes between both sides is actually the relationship between the original insurer and the reinsurer.How to identify,interpret and handle their relationship should be placed at the core when resolving reinsurance legal problems.In addition,the court's interpretation to the express and implied terms stipulating their relationship is also key to resolve the dispute arising out of the claims of payments.Obviously,the consistency between the terms of the original insurance policy and terms of reinsurance policy will not only be great helpful to determine whether the reinsurance payment should be made and the extent of the compensation,but also it will facilitate the settlement of the disputes.In practice,the liabilities and risks covered shall be clearly stipulated in the original insurance policy,while in contrast,the reinsurance policy usually gives ambitious provision to express that the terms and conditions contained herein should be consistent with terms and conditions in the original insurance policy.The ambition of the terms and conditions of reinsurance policy makes it hard for the party to express clearly its true intention and the rights and obligations of both parties are provided by implication,causing different understandings on the same term and affecting the reinsurance compensation liability.With regard to the legal effect of incorporation of terms,it is necessary to clarify the meaning of Independence of reinsurance and original insurance,and then determine the consistency of the two policies using the incorporated terms to determine whether reinsurance payment should be made.Incorporation of terms into reinsurance policy provides a special legal effect,i.e.,if a specific term is not expressly set forth in the reinsurance policy,then the corresponding term contained in the original insurance policy shall be incorporated into the reinsurance policy to guarantee the consistency of the two policies and to determine the compensation disputes.The aim of the incorporation is to protect the full rights and interests of the original insurer.The effect of full reinsurance largely depends on the incorporation.To cause the incorporation into force,the original insurance policy should be made prior to the reinsurance policy,the terms and conditions incorporated in should be relevant to reinsurance issues and should be made easily understood.Incorporated terms and conditions should also be executable and shall not contradict with the original terms contained in the reinsurance policy.The following issues should be considered when incorporating the terms of the original insurance policy:The externalized consistency between the terms of original policy and terms of reinsurance policy describes the literal relevance of the two policies.When both policies have provisions on the same matter,the presumption of back to back cover is necessary to determine whether the aforesaid terms of the two policies should be given the same interpretation,based on which the reinsurer then shall determine whether reinsurance payment should be made.In reinsurance legal practice,when the judge should use the presumption of back to back cover to interpret the internal consistency of the two policies,and subject to the consistency of terms of the two policies,the judge will take into consideration of the business context and the business strategy goal of reinsurance industry of influential countries to balance the interests of the two insurers specialized in risk operations.Meanwhile,the standard terms vary with the difference of insurance market climate and reinsurance methods,and it is difficult to develop a specific interpretation rules,therefore,the presumptionof back to back cover is better suitable for countries implementing case law systemwith greater discretion flexibility.In terms of compensation liability,the original insurer and reinsurer can be deemed as a community with the same destiny.The two parties establish their relationship in good faith,in hope of handling the indemity in an effective manner.The reinsurershall be bound by the insurance arrangement and compensation processing,and shall compensate the original insurer for its loss in order to protect the right and interest ofthe original insurer and avoid the reinsurer defending the original insurer against the compensation.This will promote the effective cooperation between both parties.In the event of a breach of good faith by the reinsurer,then the community with the same destiny shall lose its foundation.As the Catastrophe risk is getting higher around the globe since 1990s,the insurer is shouldering heavier compensation burden than what they can carry,the currently-working risk transmission mechanism between the insurers,the reinsurers and the reinsurers is the cause for the overall decline of profit attributable to the reinsurance industry.The reinsurers,for the sake of their own interests,are challenging the conditions of being a community with the same destiny.Meanwhile,the reinsurer will not liable for the ex gratia payments and the punitive compensation incurred by the original insurer and not suffer the same fate with the original insurer unconditionally.Whether the laws applicable to the original insurance and to the reinsurance are consistent will have direct impact on the compensation liability scope of the reinsurer.Driven to the Globalization of the reinsurance,foreign-related reinsurance policies usually contain the terms regarding applicable law.The application of the reinsurance law is similar to the application of general laws,which means the law agreed by both parties shall be the preferable applicable law.In the event the two parties do not agree upon the applicable law,then the applicable law shall be determined in accordance with the principle of most significant connection.However,some countries has become well accustomed to the reinsurance system developed from the conventions,and has derived reinsurance broker market.Reinsurance market and reinsurance broker become a special factor to determine the law implied by both parties.Considering the independence of the reinsurance from the original insurance,the difference of the reinsurance applicable law and insurance applicable law is reasonable.In practice,however,the difference of the applicable law might undermine the rights and interests of either party,causing the original insurer unable to recover payment from the reinsurer or the reinsurer to take excessive compensation liability.According to the presumption of back to back cover,the governing law of the original insurance policy should apply to reinsurance depending on the actual case.The research of particular legal issues regarding reinsurance greatly depends on the analysis of Anglo American case law,it is difficult to find the corresponding reinsurance legal practice in China.However,with the development of China's reinsurance industry,reinsurance disputes will also increase the relevant rules of case law countries can be directly used by us.In addition,is obvious to see significance of the various special rules dealing with the relationship between original insurance and reinsurance:the parties should choose appropriate reinsurance form,in that the possible disputes in future would be simplified settled through legal action;the parties should try to use express terms to accurately express the contents of the contract,to avoid the judge who is unable to explain the parties' misunderstanding properly due to the lack of discretion of judges;the original insurer should fully communicate with reinsurers to fulfill the principle of utmost good faith and cooperation when dealing with settlements,and regards win-win cooperation as the starting point and end-result of reinsurance.