Reinsurance

What Does Reinsurance Mean?

Reinsurance is a form of insurance designed for insurance companies. In reinsurance, reinsurers assume a portion or all of the risks from a ceding insurance company, which often distributes its total risk among multiple reinsurers. The purpose of reinsurance is to mitigate the risk of the ceding company facing insolvency or bankruptcy by spreading out the risks and costs associated with the insurance business.

Reinsurance is also referred to as “insurance for insurers.”

Insuranceopedia Explains Reinsurance

Reinsurance essentially involves one insurance company assuming the risks undertaken by another. The ceding company pays the reinsurer a portion of the premiums it receives from its insured clients. In return, the reinsurer takes on a greater risk and is liable to the ceding company if any of the covered risks occur.

Since the reinsurance contract exists solely between the ceding company and the reinsurer, the policyholders’ rights remain unaffected. The ceding company remains fully liable to its insured clients for all claims and benefits associated with their policies.

A reinsurance policy reduces the risk of bankruptcy for the ceding company, which may otherwise face enormous claims costs following a major disaster or similar events.

The reinsurer may be a dedicated reinsurance company specializing solely in reinsuring insurance companies or simply another insurance company.