Reinsurance

Reinsurance is a practice in the insurance industry where an insurance company reduces its possible maximum loss by obtaining insurance from another insurer. This process allows insurance companies to remain solvent after major claims events and helps them to stabilize their financial results.

Overview

In a typical reinsurance contract, the company that purchases the reinsurance policy is known as the "ceding company" or "cedent" or "cedant" under most arrangements. The company issuing the reinsurance policy is referred to simply as the "reinsurer". In these arrangements, the reinsurer will pay a share of the claims incurred by the ceding company in exchange for a share of the premiums received by the ceding company.

Types of Reinsurance

There are two main types of reinsurance – facultative reinsurance and treaty reinsurance. Facultative reinsurance is negotiated separately for each insurance policy that is reinsured. Treaty reinsurance means that the reinsurer covers all or a portion of the risks covered by the insurance policy issued by the ceding company.

Facultative Reinsurance

Facultative reinsurance is a method of reinsurance in which the reinsurer can accept or reject any risk presented by the ceding company. This type of reinsurance is usually purchased by ceding companies for individual risks not covered by their reinsurance treaties, for amounts in excess of the monetary limits of their reinsurance treaties and for unusual risks.

Treaty Reinsurance

In treaty reinsurance, the ceding company and the reinsurer negotiate and execute a reinsurance contract under which the reinsurer covers the specified share of all the insurance policies issued by the ceding company which come within the scope of that contract.

Benefits of Reinsurance

Reinsurance has several purposes: it can protect an insurer's solvency by reducing its liability for a single event that could lead to a large number of claims; it can help an insurer stabilize its underwriting results by evening out the impact of large individual losses and catastrophic events; and it can provide an insurer with the capacity to write more business than it could otherwise safely do.

See Also

• Insurance
• Facultative reinsurance
• Treaty reinsurance

Reinsurance Resources
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