What is Re-insurance?
Re-insurance is a contractual agreement in which one insurance company (the “ceding company”) transfers a portion of its risk to another insurance company (the “reinsurer”). This process helps the primary insurer manage its exposure to large claims or catastrophic events by spreading the risk across multiple parties.
Re-insurance is a critical part of the insurance industry, particularly in fields like homeowners or property insurance, where significant losses from natural disasters like hurricanes, floods, or wildfires can occur. It ensures that the primary insurer remains financially stable by limiting its potential losses in the event of a large claim or series of claims.
For example, if a natural disaster causes widespread damage to homes, the primary insurer may face overwhelming claims. However, with re-insurance, the reinsurer would share part of the financial burden, ensuring that the ceding company can meet its obligations to policyholders without exhausting its reserves.
Re-insurance can be structured in different ways, including proportional and non-proportional agreements, depending on the level of risk-sharing between the companies.