Reinsurer

DEFINITION of 'Reinsurer'

A company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to handle on their own and make it possible for insurers to obtain more business (that is, underwrite more policies) than they would otherwise be able to. Reinsurers also make it possible for primary insurers to keep less capital on hand to cover potential losses.

BREAKING DOWN 'Reinsurer'

A primary insurer, which is the insurance company and individual or business purchases a policy from, transfers risk to a reinsurer through a process called cession. Just as insurance policyholders pay premiums to insurance companies, insurance companies pay premiums to reinsurers. The premiums primary insurers pay to reinsurers may be reduced by any commission the reinsurer pays to the insurer. The price of reinsurance, like the price of insurance, depends on the amount of risk. Reinsurers often have the word “Re” in their names (e.g., Allianz Re, Cologne Re, Swiss Re).

Reinsurers also help spread out the risk of insuring natural disasters like earthquakes and hurricanes. Such an event could result in more claims than the primary insurer could pay out without going bankrupt, since there would not only be a high dollar amount of claims, but they would all be made in the same time period. By transferring part of the risk (and part of the premiums) of insuring against these events to several reinsurers, individuals and businesses are able to purchase insurance for these perils and insurance companies are able to stay solvent.

Reinsurers offer five main types of policies: facultative, treaty, proportional, non-proportional and retrocession. Facultative reinsurance is used when a single insurance contract is so large that it requires its own reinsurance, such as a large life insurance policy for an extremely wealthy individual. Treaty reinsurance is used when one reinsurance contract can cover a large pool of similar risks. Proportional reinsurance allows primary insurers and reinsurers to share a proportional share of premiums and risks. With non-proportional reinsurance, the reinsurer covers losses based on their size. Finally, retrocession allows reinsurers to purchase reinsurance.

RELATED TERMS
  1. Reinsurance Credit

    An accounting entry made by an insurer for premiums ceded to ...
  2. Cession

    The portions of the obligations in an insurance company's policy ...
  3. Treaty Reinsurance

    A reinsurance contract in which a reinsurance company agrees ...
  4. Yearly Renewable Term Plan of Reinsurance

    A type of life reinsurance where mortality risks are transferred ...
  5. Portfolio Reinsurance

    A type of reinsurance contract in which an insurer has a large ...
  6. Schedule F

    A section in an annual insurance statement in which reinsurance ...
Related Articles
  1. Economics

    How Does Reinsurance Work?

    Reinsurance is a practice in which insurers transfer portions of portfolios to other parties in order to reduce their exposure to claims.
  2. Personal Finance

    World's Top 10 Insurance Companies

    These are the 10 largest insurance companies in the world.
  3. Investing Basics

    2 Ways Hedge Funds Avoid Paying Taxes

    Learn about two strategies hedge funds use to minimize their tax liabilities. Read why some hedge funds are in the reinsurance business in Bermuda.
  4. Investing Basics

    The Industry Handbook: The Insurance Industry

    As a result of globalization, deregulation and terrorist attacks, the insurance industry has gone through a tremendous transformation over the past decade. In the simplest terms, insurance of ...
  5. Home & Auto

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  6. Home & Auto

    Intro To Insurance: Fundamentals Of Insurance

    By Cathy ParetoHow does insurance work? Insurance works by pooling risk.What does this mean? It simply means that a large group of people who want to insure against a particular loss pay their ...
  7. Markets

    The 5 Biggest Canadian Insurance Companies

    Learn more about the insurance industry as a whole, how it functions in Canada, and the five largest Canada-based insurance companies.
  8. Insurance

    Explaining Insurance

    Insurance is a form of contract between an individual and an insurance company that spreads risk in exchange for premium payments.
  9. Home & Auto

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  10. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
RELATED FAQS
  1. Why do some companies in the insurance sector engage in reinsurance?

    Discover how some companies in the insurance sector engage in reinsurance. Reinsurance allows insurance companies to transfer ... Read Answer >>
  2. What is reinsurance?

    Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit ... Read Answer >>
  3. What is Warren Buffett's relation to "Supercat" insurance?

    Understand the concept of catastrophe reinsurance and learn how Berkshire Hathaway makes billions providing such insurance ... Read Answer >>
  4. What are the main factors that impact share prices in the insurance sector?

    Learn about some of the main factors that impact share prices in the insurance sector. Insurance companies make money by ... Read Answer >>
  5. What risks do I face when investing in the insurance sector?

    Read about the unique challenges faced by insurers, and learn how those challenges manifest themselves as risks for equity ... Read Answer >>
  6. What demographic trends are creating potential profits for insurance companies?

    Discover the ways in which insurance companies can profit from demographic trends. Two major ones are aging populations and ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center