Loading the player...

What is 'Reinsurance'

Reinsurance, also known as insurance for insurers or stop-loss insurance, is the practice of insurers transferring portions of risk portfolios to other parties by some form of agreement to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The party that diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer.

BREAKING DOWN 'Reinsurance'

Reinsurance lets insurers cover their risks by recovering some or all of the amounts they pay to claimants. Reinsurance reduces net liability on individual risks and catastrophe protection from large or multiple losses. It also provides ceding companies the capacity for increasing their underwriting capabilities in terms of the number and size of risks.

Benefits of Reinsurance

By covering the insurer against accumulated individual commitments, reinsurance gives the insurer more security for its equity and solvency and more stable results when unusual and major events occur. Insurers may underwrite policies covering a larger quantity or volume of risks without excessively raising administrative costs to cover their solvency margins. In addition, reinsurance makes substantial liquid assets available for insurers in case of exceptional losses.

Types of Reinsurance

Facultative coverage protects an insurer for an individual or a specified risk or contract. If several risks or contracts need reinsurance, each is negotiated separately. The reinsurer has all rights for accepting or denying a facultative reinsurance proposal.

A reinsurance treaty is effective for a set time period rather than on a per-risk or contract basis. The reinsurer covers all or a portion of the risks that the insurer may incur.

Under proportional reinsurance, the reinsurer receives a prorated share of the premiums of all policies sold by the insurer. When claims are made, the reinsurer bears a portion of the losses based on an agreed-upon percentage. The reinsurer also reimburses the insurer for processing, business acquisition and writing costs.

With non-proportional reinsurance, the reinsurer is involved if the insurer's losses exceed a set amount, known as the priority or retention limit. Therefore, the reinsurer does not have a proportional share in the insurer's premiums and losses. The priority or retention limit may be based on one type of risk or an entire risk category.

Excess-of-loss reinsurance is a type of non-proportional coverage in which the reinsurer covers the losses exceeding the insurer's retained limit. The contract is typically applied to catastrophic events, covering the insurer either on a per-occurrence basis or for the cumulative losses within a set time period.

Under risk-attaching reinsurance, all claims established during the effective period are covered, regardless of whether the losses occurred outside the coverage period. No coverage is given on claims originating outside the coverage period, even if the losses occurred while the contract was in effect.

RELATED TERMS
  1. Reinsurer

    A company that provides financial protection to insurance companies. ...
  2. Reinsurance Credit

    An accounting entry made by an insurer for premiums ceded to ...
  3. Reinsurance Ticket

    A notification made by an insurer which discloses the different ...
  4. Rate On Line

    The ratio of premium paid to loss recoverable in a reinsurance ...
  5. Portfolio Reinsurance

    A type of reinsurance contract in which an insurer has a large ...
  6. Treaty Reinsurance

    A reinsurance contract in which a reinsurance company agrees ...
Related Articles
  1. Insurance

    Facultative vs. Treaty Reinsurance: Differences and Examples

    Reinsurance companies offer insurance to other insurers in case the traditional insurer does not have enough money to pay claims against its written policies.
  2. Tech

    The Reinsurance Industry: An Inside Look (BRK.A)

    Warren Buffett has a major influence on the global reinsurance market, which has seen momentum in 2016 for higher revenue.
  3. Investing

    5 Reinsurance Stocks To Watch

    Due to the decline in the reinsurance sector, many stocks within the sector are now trading at historic lows relative to book value. For investors, the time may be right to pounce on the values. ...
  4. Insurance

    Insurance, Excess Insurance and Reinsurance: What's the Difference? (ALL)

    Understanding the differences might help you avoid being overinsured or underinsured.
  5. Insurance

    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.
  6. Insurance

    Third Point Reinsurance Notes Largest Profit in Years

    Third Point Reinsurance saw a tripling of net income in the second quarter of 2016 over last year.
  7. Insurance

    World's Top 10 Insurance Companies

    These are the 10 largest insurance companies in the world.
  8. Taxes

    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.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What is the average return on total revenue for the insurance sector?

    Learn about the three main segments of the insurance industry, and find out what the average return on revenues is for the ... Read Answer >>
Hot Definitions
  1. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  2. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  3. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  4. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  5. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  6. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
Trading Center