Reinsurance

Reinsurance is a practice where an insurance company, called the ceding company, transfers part of its risk to another insurance company, known as the reinsurer. It lets insurers spread risk, reduce exposure to losses, and maintain financial stability when unexpected or catastrophic events occur.

Example

An insurance company issues a policy covering a large commercial building worth $100 million against fire damage. To limit its liability if a catastrophic loss happens, the insurer may purchase reinsurance for part of the risk, for example $50 million. If the building suffers fire damage that results in a $75 million loss, the original insurance company would pay the first $50 million, and the reinsurer would cover the remaining $25 million. Reinsurance helps insurers manage risk, maintain solvency, and offer coverage for high-value or high-risk policies that might otherwise be unaffordable or unavailable.