What Is Reinsurance?
Reinsurance is a contract between a reinsurer and an insurer that transfers some of the insured risk to another company. It allows insurers to remain solvent by recovering some or all of a payout. Reinsurance can also help insurers increase their underwriting capacity, diversify their portfolio, and benefit from the reinsurer’s expertise. There are different types of reinsurance, such as proportional, non-proportional, facultative, and treaty.
How Reinsurance Works
Reinsurance is a way for insurance companies to spread or transfer the risk of paying large or multiple claims to another insurance company. Reinsurance allows insurers to limit or recover their losses and remain solvent1. The insurance company that buys the reinsurance policy is called a ceding company or cedent. The insurance company that sells the reinsurance policy is called a reinsurance company.
There are two main types of reinsurance: proportional and non-proportional. In proportional reinsurance, the ceding and reinsurance companies share the premiums and losses according to a fixed percentage. In non-proportional reinsurance, the company only pays the losses exceeding a certain amount, called the deductible or priority.
Reinsurance can help insurance companies by providing risk transfer, financial assistance, capacity increase, and stability. Reinsurance can also help the insured by ensuring that their claims are paid in case of a large-scale disaster or a bankruptcy of the primary insurer.
Benefits of Reinsurance
Reinsurance is beneficial for insurance companies in many ways. It reduces their exposure to large losses from single events or multiple claims related to one event (such as an earthquake) by sharing the risk with another company. This helps them maintain a stable financial position in the volatile insurance industry.
Reinsurance also has advantages for the consumer, as it ensures that catastrophic claims are paid, and more insurance companies can stay in business. Insurance companies need sufficient funds to cover any claims they have agreed to insure, which safeguards consumers and limits their capacity to take on more business. By transferring some of the risk and obligations to the reinsurer, the insurance company can increase its underwriting ability and potentially offer more competitive prices in the insurance market