reinsurance

Reinsurance is a practice in the insurance industry where one insurance company, known as the ceding insurer, transfers a portion of its risks to another insurer, called the reinsurer. This process allows the originating insurer to accept more risk than it could otherwise handle, as unwanted portions can be passed on.1

Reinsurance helps to stabilize insurer profits, reduce the capital needed to underwrite business, and even allows insurers to divest themselves of entire segments of their risk portfolio. Contracts called treaties outline how premiums and losses are shared. Two main types of treaties are pro rata, where premiums and losses are divided by stated percentages, and excess-of-loss, where the originating insurer covers losses up to a certain amount, and the reinsurer covers losses above that threshold. Facultative reinsurance is arranged on an individual basis for specific risks.1