Definition:Reinsurance

🔄 Reinsurance is a mechanism through which insurance carriers transfer portions of their risk portfolios to other insurers, effectively purchasing insurance for themselves. Often described as "insurance for insurance companies," reinsurance allows a ceding company to protect its balance sheet against catastrophic or unexpectedly concentrated losses. The practice dates back centuries and remains a foundational pillar of global insurance markets, enabling underwriting capacity that no single carrier could safely sustain alone.

⚙️ A ceding company enters into a reinsurance treaty or facultative agreement with a reinsurer, specifying which risks or layers of loss the reinsurer will assume. Under proportional arrangements, the reinsurer shares premiums and losses at a fixed ratio, while non-proportional structures — such as excess of loss — trigger coverage only once losses breach a defined retention threshold. The ceding commission paid back to the primary insurer offsets its acquisition costs, and detailed bordereaux track the underlying exposures flowing through the arrangement.

💡 Without reinsurance, the global insurance industry would lack the financial resilience needed to absorb large-scale events like hurricanes, earthquakes, or pandemic-related claims. It stabilizes solvency ratios, smooths earnings volatility, and gives primary carriers the confidence to write larger or more complex policies. Regulators and rating agencies alike view a carrier's reinsurance program as a key indicator of financial health, making it central to both strategic planning and capital management.

Related concepts

• Definition:Retrocession
• Definition:Catastrophe bond (cat bond)
• Definition:Reinsurance treaty
• Definition:Excess of loss reinsurance
• Definition:Ceding company
• Definition:Risk transfer