Reinsurance

What is Reinsurance?

Reinsurance is the mechanism by which insurance companies transfer portions of their risk portfolio to other parties to reduce the likelihood of paying a large obligation from a significant insurance event. The reinsurance company insures the insurer — the primary company that sold the original policy (the cedant) pays a premium to the reinsurer in exchange for coverage against losses exceeding agreed thresholds.

Reinsurance serves three primary functions: it provides capital relief (allowing insurers to write more business than their balance sheet would otherwise permit), it stabilizes loss experience (smoothing out the impact of large individual losses), and it provides catastrophe protection (covering against the aggregation of many smaller losses in a single event).

How Reinsurance Works

The reinsurance transaction flows from original insured → primary insurer (cedant) → reinsurer. The cedant issues a policy to the original insured, collects premium, and then cedes a portion of both premium and risk to the reinsurer under a reinsurance agreement (treaty). When a covered loss occurs, the reinsurer pays the cedant its proportional share of the loss, and the cedant pays the original insured.

Types of Reinsurance

Treaty Reinsurance: A standing agreement covering all risks within a defined class automatically. The cedant does not need to submit individual risks for acceptance — the treaty applies automatically to qualifying business.

Facultative Reinsurance: Individual risks submitted and accepted (or declined) by the reinsurer on a case-by-case basis. Used for large, unusual, or non-standard risks that fall outside treaty terms.

Proportional Reinsurance: The reinsurer shares in both premium and losses in an agreed proportion. Includes quota share (fixed percentage) and surplus share (variable percentage based on policy size).

Non-Proportional Reinsurance: The reinsurer pays only when losses exceed a specified threshold (the retention). Includes excess of loss and stop loss arrangements.

Reinsurance Documentation Requirements

Reinsurance operations generate substantial documentation requirements: treaty wordings, endorsements, cedant bordereau reports (premium and loss), claims advices, loss development reports, and audit confirmation letters. The accuracy and timeliness of this documentation directly impacts reinsurer relationships and treaty pricing at renewal.