What is reinsurance?

Reinsurance is a crucial concept in the insurance industry that involves a ceding insurer transferring a portion of its risk exposure to another insurance company, known as the assuming insurer. This arrangement allows the ceding insurer to reduce its potential losses on high-risk policies and stabilize its financial standing. By doing so, it can manage its risk more effectively, particularly when faced with substantial claims that could threaten its solvency.

The reinsurance agreement typically stipulates the terms under which the assuming insurer will take on part of the risk. This benefits both parties: the ceding insurer increases its capacity to underwrite more policies and manage potential claims, while the assuming insurer gains premium income from the cover provided.

Understanding reinsurance is essential for grasping how insurers manage risk across the industry, allowing for greater overall stability and protection for policyholders.