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💰 '''Cost of reinsurance''' encompasses the total price a [[Definition:Ceding company | ceding company]] pays to transfer a portion of its [[Definition:Risk | risk]] to a [[Definition:Reinsurer | reinsurer]], including the [[Definition:Reinsurance premium | reinsurance premium]], any [[Definition:Ceding commission | ceding commissions]] netted against it, profit commissions, and the economic cost of capital that collateralizes the arrangement. For primary [[Definition:Insurance carrier | insurers]], this cost is one of the most significant line items on their income statement and directly influences [[Definition:Underwriting | underwriting]] strategy, [[Definition:Pricing | pricing]] adequacy, and [[Definition:Capital management | capital management]] decisions. It is not a single number but a multidimensional calculation that reflects market conditions, the ceding company's [[Definition:Loss experience | loss experience]], the structure of the [[Definition:Reinsurance program | reinsurance program]], and the prevailing [[Definition:Underwriting cycle | underwriting cycle]] phase.

⚙️ Several factors determine the cost. In [[Definition:Proportional reinsurance | proportional treaties]], the cost is embedded in the split of [[Definition:Premium | premiums]] and losses, adjusted by the ceding commission the reinsurer pays back to cover the cedent's [[Definition:Acquisition cost | acquisition]] and administrative expenses. In [[Definition:Excess-of-loss reinsurance | excess-of-loss]] placements, the reinsurer charges a risk premium — often expressed as a [[Definition:Rate on line (ROL) | rate on line]] — that reflects the expected loss, expense load, and a margin for profit and [[Definition:Cost of capital | cost of capital]]. Catastrophe reinsurance pricing is further influenced by modeled [[Definition:Probable maximum loss (PML) | PML]] estimates, the availability of [[Definition:Retrocession | retrocession]], and broader capital market conditions, including the supply of [[Definition:Insurance-linked securities (ILS) | ILS]] capacity. Brokers like [[Definition:Reinsurance broker | reinsurance intermediaries]] play a key role in optimizing placement across markets to minimize total cost while maintaining desired coverage quality.

📉 From a strategic standpoint, the cost of reinsurance acts as a fundamental constraint on how much risk a primary insurer retains versus transfers. When reinsurance costs rise — as they did sharply following the 2017 hurricane season and again in 2023 — cedents face a choice: absorb higher costs and compress margins, increase [[Definition:Net retention | net retentions]] and take on more volatility, or pass costs through to [[Definition:Policyholder | policyholders]] via higher primary rates. The interplay between primary pricing and reinsurance costs is one of the central dynamics of the [[Definition:Insurance market cycle | insurance market cycle]]. Executives who manage this tension well — buying reinsurance strategically, timing renewals effectively, and diversifying protection across traditional and [[Definition:Capital markets | capital market]] sources — position their companies to weather adverse periods while capitalizing on favorable ones.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Reinsurance premium]]
* [[Definition:Rate on line (ROL)]]
* [[Definition:Ceding commission]]
* [[Definition:Net retention]]
* [[Definition:Reinsurance program]]
* [[Definition:Insurance-linked securities (ILS)]]
{{Div col end}}

Definition:Cost of reinsurance - Revision history

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