What is reinsurance?

Reinsurance is best thought of as "insurance for insurance companies," a way for a primary insurer to protect against unforeseen or extraordinary losses. Reinsurance serves to limit liability on specific risks, to increase individual insurers' capacity, to share liability when losses overwhelm the primary insurer's resources, and to help insurers stabilize their business in the face of the wide swings in profit and loss margins inherent in the insurance business. For example, reinsurance plays a critically necessary, though behind-the-scenes, role in the financial management of natural disaster losses.

In a reinsurance contract one insurance company (the reinsurer, or assuming insurer) charges a premium to indemnify another insurance company (the ceding insurer) against all or part of the loss it may sustain under its policies. Reinsurance contracts may cover a specific risk or a broad class of business. Reinsurance is a global business. Its international nature reflects a further spreading of risk and access to broader capital markets to help cover losses. About 40% of all U.S. property/casualty reinsurance premiums, and two-thirds of all U.S. property catastrophe reinsurance premiums, are written by foreign reinsurance companies.

Reinsurance Glossary

Fundamentals of Reinsurance