What is double insurance and reinsurance?

What is double insurance?

Double insurance refers to the insurance where the same subject matter is insured twice or more than that. The same subject is insured but with different insurance companies.

This insurance comes to light when a business avails insurance WRT the same risk and subject matter from two different insurers. Double insurance is not illegal at all. 

Double insurance can lead to insurance companies arguing about whether they have payout at all, causing an unexpected delay in the claim processing.

It should not be perceived from a coverage layering viewpoint. It is where the insurance policies are placed with distinct insurance policies to safeguard different exposure levels.

Why do people take double insurance?

You would know that making investments in different insurance policies will benefit you with not only a backup in case of some emergency situations or losing your job and switching from one another company. It completely protects the coverage of an individual.

General principles of double insurance:

• A business entity should not be left without insurance payment, where there is a presence of double insurance.
• A business entity intends to claim a loss covered by more than one policy and it will be entitled to claim whichever insurance policy it refers to.
• The company that doesn't dispense cover the double insured risk can approach other insurers for the contribution which has rendered similar cover.
• If a business claims under one insurance policy and not the other then the insurance company that has not paid out probably has to pay a share to the insurer who has paid out.

Clauses pertaining to double insurance:

• Escape clause: It allows the insurers to reject any claim request if they found that the insured is levering another policy which renders the same benefits.
• Notification clause: It mandates the insurer to make the prior intimation to the insurer regarding the existence of the alternative policy, failing to which policy will be cancelled.
• Excess clause: It talks about the disbursement of the actual claim amount that comes out after subtracting the claim sum that was already availed by the insured from another insurer.
• Rateable clause: Rateable clause prevents insurers from dispensing the entire claim amount to the insured in the case of double insurance.

Double insurance = indemnity +  insurance?

It is aimed at the indemnity called first with  the insured then claim on insurance.

In other scenarios, the indemnity aimed to be an Alternative to insurance. It makes sure that the indemnity is not caught by other insurance norms or the indemnity arrangement doesn't render insurers with the scope to argue that there ought to be a contribution, right by the insurer against the identifier.

What is Reinsurance?

It occurs when multiple insurance companies share risk by purchasing the insurance policies from other insurers to limit their total loss in case of disaster. 

The insurance company takes on client whose coverage would be so great of a burden for single insurance company to handle alone. The premiums which paid by insured are typically shared by all insurance companies.  

With the help of reinsurance, the company gives some of its part of their liabilities to the other insurance company. Let us now get to know how reinsurance actually works.
How Reinsurance works?

Let just start with a example:

Consider a massive hurricane which makes landfall in Florida and it causes billions of dollars in damage. If a company sold all the homeowner insurance then the chance of being able to cover the losses would be unlikely. 

The retail of insurance company will spread parts of the coverage to other insurance companies, which means spreading the cost of risk among many insurance companies. 

The insurers purchase reinsurance only for four reasons: These are: To limit a liability on a specific risk, To protect themselves and the insured against catastrophes, To stabilize loss experience and To increase their capacity. 

If a company assumes the risks on their own then the cost could bankrupt or financially ruin the insurance company and by possibly not to cover the loss for the original companies which paid the insurance premium.

Difference between Double insurance and Reinsurance?

1. Meaning:-

Double insurance:- In this, the same risk is insured with different insurance companies or more than one insurance company.
Reinsurance:- In this, the risk or a part of risk is transferred to another insurance company. The risk will remains the same.

2. Subject:-

Double insurance:- This is basically taken for properties having a high value.
Reinsurance:- This covers the risk of original insurer.

3. Claim:-

Double insurance:- In this insurance, you can claim to all the insurance companies for compensation.
Reinsurance:- You have to claim from the original insurer and claim from the insurer.

4. Loss:-

Double insurance:- In this, the loss will shared by all the insurance company from which you have taken the insurance.
Reinsurance:- It will only be liable to pay the proportion of insurance.

5. Goal:-

Double insurance:- This insurance plan goal is to assure the benefit of insurance.
Reinsurance:- This insurance plan goal is to reduce the risk of the insurer.

6. Interest of insured:-

Double insurance:- In this plan, the insured has an insurable interest.
Reinsurance:- In this plan, the insured doesn’t have an insurable interest.

7. Insured approval:-

Double insurance:- Insured approval is needed in the double insurance.
Reinsurance:- Insured approval is not needed in the reinsurance because it is done on the insurer’s end.