Reinsuring

Reinsuring, or reinsurance, is the practice whereby an insurance company (the ceding company) transfers part of its risk to another insurer (the reinsurer). The objective is to limit exposure to large losses, stabilize underwriting results, and free capital for additional insurance writing. Reinsurance can be arranged for individual risks (facultative reinsurance) or for a portfolio of risks under a treaty (treaty reinsurance).

Methods: In proportional (pro rata) reinsurance, the reinsurer shares a fixed percentage of premiums and claims. Common forms include quota share and surplus share. In non-proportional reinsurance (also called excess of loss), the reinsurer covers losses above a stated attachment point up to a limit, with no automatic sharing of premiums; popular forms are per-occurrence and aggregate excess of loss.

Contractual structure: In a treaty, terms apply to a defined book of business; in facultative, each risk is individually negotiated. The ceding company pays the reinsurer a premium (ceding commission may be included) and receives claims payments when losses occur, subject to the agreed terms. The reinsurer bears part of the risk and contributes to capital relief and solvency management for the ceding company.

Regulation and market: Reinsurance is worldwide and heavily regulated in many jurisdictions; large players include global reinsurers that provide capacity and specialized lines. Reinsurance pricing depends on risk characteristics, historical loss experience, and capital considerations. Reinsurers may also provide risk management services and underwriting expertise.

Impact: Reinsurance affects insurance availability and pricing, supports risk transfer, and helps insurers manage capital requirements and volatility in results.