reinsurance

Reinsurance is insurance purchased by an insurance company from another insurer to manage risk. It involves the transfer of a portion of the ceding company's risk to a reinsurer in exchange for a fee, thereby reducing the insurer’s net exposure and stabilizing results.

The parties and forms of reinsurance are diverse. The ceding company (the primary insurer) transfers risk to the reinsurer. Reinsurance can be treaty, covering a portfolio of policies or a class of business, or facultative, applying to a single risk or a defined group. It can be arranged on a pro rata basis, where premiums and losses are shared in proportion to the coverage, or on an excess of loss basis, where the reinsurer pays only when losses exceed a specified attachment point. Common variants include per risk, per occurrence, and aggregate stop loss arrangements.

Key terms in a reinsurance contract include ceding commission, retention or limit, attachment point, and reinsurance limit. The arrangement may also involve coinsurance, where the reinsurer shares the risk on a proportional basis, and retrocession, where the reinsurer passes some risk to another reinsurer.

Purposes and benefits include stabilizing loss experience, improving solvency margins, increasing underwriting capacity, and providing access to specialized expertise and catastrophe protection. Reinsurance also helps insurers diversify risk and manage capital requirements.

Regulation and market context vary by jurisdiction but generally involve solvency and capital adequacy standards. Global reinsurance is a large, highly specialized, and cyclical market influenced by risk appetite, pricing, and regulatory regimes such as Solvency II and various national regimes.