What is reinsurance?

Reinsurance is a financial arrangement where a primary insurer, which is the original company providing insurance coverage, takes out a policy with another insurer, known as the reinsurer. This arrangement allows the primary insurer to transfer a portion of its risk to the reinsurer, thereby reducing its potential liability and providing additional security against large claims or catastrophic losses.

By engaging in reinsurance, a primary insurer can stabilize its financial standing and enhance its ability to underwrite new policies, since it is not solely responsible for the total amount of claims that could arise from its insured events. This practice is crucial in the insurance industry as it helps insurers manage risk effectively and maintain solvency.

Reinsurance differs from direct insurance operations, where insurers engage directly with policyholders. It also does not involve the cancellation of insurance programs or policies sold by one insurer to another, which neither represents the core purpose of reinsurance nor reflects how insurance coverage is structured within the market.