Reinsurance is an insurance for the insurance company

Reinsurance is a contract between a reinsurer and an insurer, often called insurance for insurance companies. In this agreement, the ceding party or insurer transfers a portion of its insured risk to the reinsurance company. The reinsurance company then takes on all or some of the insurance policies issued by the ceding party.

How It Works

Insurers can stay financially stable through reinsurance, as it helps them recover a portion or all of the money paid to claimants. Reinsurance lessens the overall liability on individual risks and offers protection against significant or multiple losses.

Moreover, reinsurance allows ceding companies, which are insurance companies that transfer their risk to another insurer, to enhance their underwriting capabilities by expanding the number and size of risks they can handle.

Benefits of Reinsurance

Reinsurance provides insurers with added protection for their financial stability and ability to handle unexpected, significant events by covering their accumulated liabilities. It allows insurers to offer policies that cover a greater amount of risk without incurring high administrative expenses to maintain their solvency. Furthermore, reinsurance provides insurers with access to significant liquid assets in case of extraordinary losses.

Types of Reinsurance

A facultative reinsurance proposal allows the insurer to protect themselves against specific risks or contracts. If multiple risks or contracts require reinsurance, they are renegotiated individually.

The reinsurance treaty has the authority to accept or reject the facultative reinsurance proposal.

Breaking Down Reinsurance

In proportional reinsurance, the reinsurer gets a portion of all premiums sold by the insurer. They also bear a portion of the losses based on a pre-negotiated percentage and reimburse the insurer for various costs.

Non-proportional reinsurance, on the other hand, doesn’t involve a proportional share in premiums and losses. The priority or retention limit is based on a specific type of risk or an entire risk category.

Excess-of-loss reinsurance is a type of non-proportional coverage where the reinsurer covers losses that exceed the insurer’s retained limit or surplus share treaty amount. This type of contract is usually used for catastrophic events and can cover the insurer on a per-occurrence basis or for cumulative losses within a specific period.

Risk-attaching reinsurance covers all claims made during the effective period, regardless of when the losses occurred. Claims originating outside the coverage period are not covered, even if the losses occurred while the contract was in effect.


Reinsurance, also known as “insurance for insurance companies,” occurs when a reinsurer and an insurer enter into a contract. In this agreement, the insurer, referred to as the ceding party or cedent, transfers a portion of its insured risk to the reinsurance company. Consequently, the reinsurance company takes on some or all of the insurance policies issued by the ceding party. By utilizing reinsurance, the risk is shifted to another company, minimizing the chances of facing significant payouts for multiple claims.