Reinsurance

Reinsurance is insurance purchased by an insurer to transfer part of the risk it has assumed to another insurer, the reinsurer. It is used to increase underwriting capacity, share large risks (including catastrophic losses), stabilise results, and support capital and solvency management. The International Association of Insurance Supervisors says "Reinsurance is insurance for insurers. Just as firms and individuals buy insurance for perils they do not want to bear, primary insurers purchase reinsurance for risks they do not want to fully retain. Reinsurers absorb losses that are not retained by primary insurers, and in so doing they limit the earnings volatility of primary insurers. Reinsurers pursue the same business model as primary insurers. They contract with the primary insurer (or cedant) to reimburse any future claim the primary insurer may have against the payment of a premium today. In order to meet future claims, reinsurers apply the same insurance techniques and models for risk selection as primary insurers, and they follow the same insurance accounting principles. Just like primary insurers, reinsurers are prefunded through premium payments, and they pursue similar general approaches to asset liability management (ALM)".

Reinsurance arrangements are commonly classified as facultative, which applies to individual risks, or treaty, which covers a class of business under a standing agreement between the parties.

Treaty and facultative arrangements may be structured on a pro rata (proportional) basis or an excess of loss (non-proportional) basis, depending on how premiums and losses are shared and on the retention and limits set in the contract.