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🔁 '''Indemnity reinsurance''' is the traditional form of [[Definition:Reinsurance | reinsurance]] in which the [[Definition:Reinsurer | reinsurer]] agrees to reimburse the [[Definition:Cedent | ceding insurer]] for actual losses incurred on the underlying [[Definition:Insurance policy | policies]], rather than making payments based on a parametric index or other non-indemnity trigger. This structure preserves the [[Definition:Principle of indemnity | principle of indemnity]] at the reinsurance level: the cedent must demonstrate that it has sustained a genuine financial loss before the reinsurer's obligation is activated. Indemnity reinsurance stands in contrast to [[Definition:Parametric insurance | parametric]] or [[Definition:Industry loss warranty (ILW) | industry loss warranty]] arrangements, where payouts are determined by an external metric regardless of the cedent's actual experience.

⚙️ Under an indemnity reinsurance contract—whether structured as [[Definition:Proportional reinsurance | proportional]] ([[Definition:Quota share reinsurance | quota share]], [[Definition:Surplus share reinsurance | surplus share]]) or [[Definition:Non-proportional reinsurance | non-proportional]] ([[Definition:Excess of loss reinsurance | excess of loss]], [[Definition:Stop loss reinsurance | stop loss]])—the reinsurer follows the fortunes of the cedent. When a covered [[Definition:Insurance claim | claim]] is paid, the cedent submits a [[Definition:Bordereaux | bordereau]] or individual claim report, and the reinsurer reimburses its share based on the contract terms. Because recovery depends on the cedent's actual net loss, accurate and timely [[Definition:Loss reporting | loss reporting]], supported by sound [[Definition:Loss reserves | reserving]] practices, is critical. The [[Definition:Follow the fortunes | follow-the-fortunes]] and [[Definition:Follow the settlements | follow-the-settlements]] doctrines that underpin indemnity reinsurance mean the reinsurer generally cannot second-guess the cedent's good-faith claim payments, though disputes can arise when payments fall outside the agreed scope of coverage.

💡 Indemnity reinsurance remains the dominant mechanism by which primary [[Definition:Insurance carrier | insurers]] manage volatility, protect [[Definition:Solvency | solvency]], and expand [[Definition:Underwriting capacity | underwriting capacity]]. Its alignment of reinsurer and cedent interests—since the reinsurer only pays when the cedent actually loses money—creates a natural incentive for both parties to focus on [[Definition:Underwriting | underwriting]] quality and [[Definition:Claims handling | claims discipline]]. This contrasts with non-indemnity products, which can introduce [[Definition:Basis risk | basis risk]] when the payout does not match the actual loss. Regulatory frameworks, including [[Definition:Solvency II | Solvency II]] and U.S. [[Definition:Risk-based capital (RBC) | risk-based capital]] standards, grant favorable capital treatment to indemnity reinsurance arrangements that meet [[Definition:Risk transfer | risk transfer]] tests, reinforcing the structure's centrality to the global reinsurance market.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Reinsurance]]
* [[Definition:Proportional reinsurance]]
* [[Definition:Excess of loss reinsurance]]
* [[Definition:Follow the fortunes]]
* [[Definition:Risk transfer]]
* [[Definition:Parametric insurance]]
{{Div col end}}

Definition:Indemnity reinsurance - Revision history

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