What is the difference between reinsurance and double insurance?

11 minute read Published on May 16, 2024 by BrokerLink Communications

What is the difference between reinsurance and double insurance?

Have you ever come across the terms reinsurance and double insurance in regard to insurance and wondered what they are and how they differ? While it may sound like they refer to the same thing, they actually serve two unique purposes in regard to insurance. If you’re confused, don’t stress; this blog will help you understand the unique differences between these two insurance terms, how they function, and what roles they play in the broader context of risk management and financial stability for insurance companies and policyholders alike.

Reinsurance vs. double insurance

Double insurance and reinsurance are ways insurance companies deal with risk, but they work differently and have different goals.

Reinsurance is when insurance companies share risks with each other to handle losses better and have enough money. On the other hand, double insurance happens when someone who owns something, like a house, gets it insured by more than one company at the same time.

Both methods are important in the insurance world, but they follow different rules and ideals. Let’s dive deeper into what they mean:

Reinsurance definition

Reinsurance is a strategy used by insurance companies to manage their risk exposure. At its core, reinsurance involves one insurance company, known as the ceding company, which agrees with another insurance company, referred to as the reinsurer. This allows the ceding company to transfer a portion of its risk associated with one or more of its insurance policies to the reinsurer. This means that the goal isn’t to make the reinsurer handle the policyholder but to help share the costs that might come from any claims.

There are several types of reinsurance agreements, including:

Facultative reinsurance

Where the ceding company gets extra coverage for one specific risk or policy.

Treaty reinsurance

Where the insurance company gets extra insurance that covers a whole bunch of policies in a particular area all at once.


Where both the original insurance company and the reinsurance company agree to split the costs and the money they make from premiums.


Where the reinsurance company only pays when the claims are really high.

Double insurance definition

Double insurance is when someone has multiple insurance policies for the same thing, and together, these policies could pay out more money than the thing is actually worth. This usually happens because the person who bought the insurance, not the insurance companies, decided to get more than one policy for the same thing, either intentionally or by accident.

Double insurance is based on a basic rule saying people shouldn’t profit from their losses. Instead, they should return an amount that matches what they lost. When someone has double insurance, there’s another rule that kicks in among the insurance companies. This rule says that each company should pay a part of the claim based on how much they’re responsible for, according to their own policies. This makes sure the person doesn’t get more money than the loss was worth from all the policies put together.

Who are the parties involved in reinsurance?

Reinsurance is when insurance companies make deals with each other to spread out risk so they can handle big losses more effectively. The key parties involved are:

The ceding company

This is the original insurer that underwrites the policy or policies and initially assumes the risk from the policyholder. Seeking to manage its risk exposure and financial stability, the ceding company decides to share some of this risk with another insurance company. The ceding company remains the primary point of contact for the original policyholder and is responsible for issuing the policy, handling claims, and performing all customer-facing functions.

The reinsurer

The reinsurer is the party that agrees to accept the risk transferred by the ceding company. By entering into a reinsurance agreement, the reinsurer provides a safety net to the ceding company, agreeing to cover a portion of the claims or losses in exchange for a share of the premiums. Reinsurers are specialized entities that have the capacity to absorb significant levels of risk, allowing them to provide backing to multiple insurance companies across different geographic areas and lines of business. This global spread of risk helps to stabilize the insurance market as a whole.

Brokers and intermediaries

In many cases, especially in complex or large-scale reinsurance transactions, brokers or intermediaries facilitate the arrangement between the ceding company and the reinsurer. These entities help in negotiating terms, placing the reinsurance coverage, and sometimes managing the flow of information and premiums between the two parties.

Who are the parties involved in double insurance?

Double insurance occurs in a context that involves the policyholder and multiple insurance companies, each providing coverage for the same risk:

The policyholder

This is the individual or entity that owns the insured interest and seeks coverage to protect against potential losses. In the case of double insurance, the policyholder has taken out more than one insurance policy, each from a different insurance company, to cover the same risk. The motivations behind such actions can vary, from seeking additional security to misunderstanding the coverage provided by existing policies.

The insuring companies

These are the insurance companies that have issued policies to the policyholder, covering the same risk. Each company is unaware of the other’s coverage at the time of underwriting or may become aware only when a claim is filed. In the event of a loss, these companies must coordinate to determine their respective contributions to the claim, adhering to the principles of indemnity and contribution to ensure that the policyholder is fairly compensated without exceeding the actual value of the loss.

What is the purpose of reinsurance?

Reinsurance isn’t just about one insurance company passing risk on to another. It’s a smart way for insurance companies to approach risk management and financial planning. Reinsurance comes with several benefits, including:

Risk mitigation

Reinsurance significantly reduces the impact of large claims or the accumulation of losses on the ceding company. By sharing portions of its risk, the ceding company can protect itself against scenarios that could potentially threaten its solvency.

Increased underwriting capacity

Through reinsurance, an insurance company can underwrite more policies than its capital reserve would typically allow. This is because the reinsurer assumes part of the risk, thereby enabling the ceding company to expand its business without increasing its reserve requirements proportionally.

Financial stability and performance

Reinsurance helps in smoothing out the financial performance of the ceding company over time. It achieves this by absorbing fluctuations in loss experiences, which can vary widely from year to year, especially in lines of insurance that are prone to catastrophic events.

Protection against catastrophes

For risks that could lead to catastrophic losses, such as natural disasters, reinsurance is crucial. It ensures that the ceding company can recover a portion of its losses from the reinsurer, thereby safeguarding against scenarios that could otherwise lead to financial distress.

Global risk spreading

Reinsurance enables the spreading of risks across a wider geographical area and different markets. Reinsurers, often operating globally, can pool risks from various parts of the world, diversifying their risk portfolio and stabilizing the global insurance market.

What is the purpose of double insurance?

While double insurance may not always be a strategic choice, it has its uses for the person buying the insurance. Double insurance can help them in specific ways, such as:

Additional security

Some policyholders may seek double insurance as a way to ensure comprehensive coverage. This could stem from a desire for peace of mind, ensuring that no aspect of their risk is uninsured or underinsured.

Overlap in coverage

Double insurance can occur unintentionally when policyholders purchase policies from different insurers without realizing the extent of overlap between the coverages. This may happen with complex risks or when insurance needs change over time.

Risk of underinsurance

In some cases, policyholders might opt for double insurance to avoid the risk of underinsurance, where the policy limits of one insurance policy might not be sufficient to cover the full extent of a loss. By having more than one policy, they aim to fully protect their financial interest in the insured property or liability.

What is the claims process for reinsurance?

In reinsurance, when a claim or request for payment is made, it shows how the original insurance company and the reinsurance company work together. This partnership helps keep things financially stable and manages risks. The usual steps for settling a claim are:

Initial claim handling

When a claim is filed, it is the responsibility of the ceding company to assess, validate, and settle the claim with the policyholder. The ceding company applies its standard procedures for claims handling, as it is the entity that directly interacts with the policyholder.

Reimbursement process

After the claim is settled with the policyholder, the ceding company then seeks reimbursement from the reinsurer for the portion of the claim covered under the reinsurance agreement. The amount of reimbursement is determined by the terms of the insurance contract, which may specify quotas, excesses, or other arrangements that dictate what percentage or amount of the claim the reinsurer will cover.

Financial transfer

The reinsurer, upon receiving the claim from the ceding company, verifies the claim details against the reinsurance agreement and then compensates the ceding company according to the agreed terms. This transfer of funds from the reinsurer to the ceding company helps the latter to recover a portion of the losses paid to the policyholder, thereby mitigating its financial exposure.

Risk and financial management

By transferring a portion of their risk to reinsurers, ceding companies can effectively manage their exposure to large and catastrophic losses, ensuring their financial stability and solvency. This process allows insurance companies to leverage the capital efficiency of reinsurance to expand their underwriting capacity without proportionately increasing their capital reserves. It also enables them to stabilize their financial performance over time, smoothing out the volatility associated with claim payouts, particularly in lines of business that are prone to large or unpredictable losses.

What is the claims process for double insurance?

When there’s double insurance, the process of handling claims involves different insurance companies working together. They follow the rules to make sure everything is fair, and no one makes extra money unfairly—this makes sure that everyone gets what they deserve without anyone taking advantage of the situation. Here’s how the claim process works:

Notification to insurers

When submitting a claim, the policyholder must notify all insurers involved that there are multiple policies covering the same risk. This is crucial for initiating the claim settlement process under the double insurance principle.

Principle of contribution

The principle of contribution comes into play in double insurance scenarios. This principle dictates that each insurer is liable to contribute towards the claim in proportion to the amount of cover they provide, ensuring that the total claim compensation does not exceed the actual loss suffered by the policyholder.

Coordination among insurers

Insurers involved in double insurance must coordinate with each other to determine their respective contributions to the claim. This process can be complex, requiring clear communication and agreement on calculating contributions based on each policy's terms.

Settlement and payment

Once the contributions are agreed upon, each insurer pays their share of the claim to the policyholder. The coordination effort aims to ensure that the policyholder is fairly compensated for the loss without exceeding the loss’s value, adhering to the indemnity principle.

Risk and financial management

The principle of double insurance, while not typically a strategy aimed at risk spreading by the policyholder, inadvertently plays a role in financial and risk management from the policyholder’s perspective. It ensures that the policyholder’s risk of underinsurance is minimized, providing a form of financial security against losses that might exceed the coverage of a single policy.

Double insurance and reinsurance in regards to car insurance coverage

When considering what is better for car insurance - reinsurance or double insurance—it’s important to understand that their applicability and benefits are context-dependent, particularly when we’re talking about coverage for individual policyholders versus the risk management strategies of insurance companies:


Reinsurance is when one insurance company shares some of its risks with another company to lessen its own risk on a bunch of insurance policies. It’s not something that car owners can pick or directly get benefits from like when they choose their own insurance. Instead, reinsurance helps car owners in a roundabout way by making sure their insurance company is strong enough financially to pay out claims, especially after big disasters or lots of claims happening simultaneously. Key benefits of reinsurance for car insurance from a policyholder’s perspective include:

  • Making sure your insurance company won’t run out of money and can pay you when you need it.
  • Allowing insurance companies to provide more policies and better comprehensive coverage options.
  • Helping your insurance company handle the cost of big damages from things like storms or big accidents, so they can pay claims without hiking up your payments a lot.

Double insurance

Double insurance means having two or more insurance plans for the same car that cover the same things. This is not to be confused with a multi-car insurance policy, which is one policy for multiple cars. People might choose double insurance intentionally for extra safety or by accident if they end up with two plans that cover the same stuff.

Considerations for double insurance in car insurance include:

  • Paying for more than one insurance policy costs you more money but doesn’t give you extra benefits. This is because insurance rules say you can’t get more money than what you lost.
  • Having insurance from different companies can make claiming money tricky because the companies have to figure out who pays what.
  • It’s important to think about whether having more than one policy is really better than just having one good policy.

So, what’s better for car insurance?

Reinsurance is something that regular people buying insurance don’t choose; it’s something insurance companies do to make sure they can pay out claims and stay stable. It works behind the scenes to help insurance companies be reliable.

Choosing to have double insurance is up to the person buying insurance, but it’s usually not a good idea for car insurance. It can cost more and make claiming compensation harder without giving you much extra benefit. A smarter choice is to work with your insurance company to make one policy that covers everything you need based on how much your car is worth, what risks you face, and your own financial situation.

In conclusion

Reinsurance is when one insurance company gets another to help cover big losses, helping them keep financially stable. Double insurance happens when someone has more than one policy for the same thing, which can cost more and make claiming compensation harder without giving you much extra benefit. Knowing the difference between these two can help both insurance companies and their customers make better decisions about their insurance coverage, ensuring they have the right protection!