Reinsure

Reinsure is the act or process by which an insurance company transfers a portion of its risk to another insurer, called the reinsurer, in exchange for a premium. The effect is to spread risk, protect the ceding company’s solvency, and stabilize profits by reducing the impact of large or volatile claims. Reinsurance does not eliminate risk; it reallocates it and provides additional capacity for underwriting.

There are two primary forms of reinsurance: treaty and facultative. Treaty reinsurance covers a specified class or portfolio of policies under a standing agreement, with automatic reinsurance of business that meets the contract terms. Facultative reinsurance involves individual risks or policies evaluated and ceded on a case-by-case basis, giving the ceding company control over what is transferred. Within these forms, reinsurance can be proportional or non-proportional. Proportional (or quota share) reinsurance involves the reinsurer receiving a fixed percentage of premiums and losses. Non-proportional (or excess of loss) reinsurance provides coverage when losses exceed a predefined point, often subjected to attachment points and limits.

Key participants include the ceding insurer, the reinsurer, and sometimes additional entities such as retrocessionaires that reinsurers use to transfer risk further. Reinsurance pricing reflects expected losses, volatility, policy terms, and diversification benefits. It serves regulatory and capital purposes by reducing required reserves and increasing underwriting capacity, while also introducing counterparty risk and potential basis mismatches between ceded premiums and eventual claims.

Overall, reinsure is a fundamental risk-management tool in the insurance industry, enabling insurers to absorb larger or more uncertain liabilities and to operate with greater financial stability.