Return to Reinsurance (idea)

Context: [insurance], [risk theory]

Reinsurance, often [abbreviation|abbreviated] as [re], is an integral part of [risk management] for an [insurance] company. An insurance company (often called the [primary] insurer or ceding company) will on-purchase (part or all of) the insurance [policy|policies] it has sold to policyholders to an reinsurer. The primary insurer will pay [premium|premiums] to the reinsurer, and in return the reinsurer will pay part or all of the claims associated with the policies when they occur.

Reinsurance can take several major forms:

  • Proportional Reinsurance. For each claim that was incurred, the reinsurer will pay a [proportion] a of the claim amount.
  • Excess-of-loss Reinsurance. For each claim that exceeds a defined amount b (called the [retention] level), the reinsurer will pay the amount that exceeds the retention level.
  • Stop-loss Reinsurance. If the total claims over a defined time period exceeds the [retention] level b, the reinsurer will pay that amount that exceeds the retention level.

Reinsurance helps manage the following situations:

  • An instance of [catastrophy|catastrophic] claim amounts, e.g. several [order of magnitude|orders of magnitude] over the average claim amount. An excellent example of this has occurred [September 11, 2001|recently].
  • A season where the claims occur unusally [frequent|frequently]. [Natural disaster|Natural disasters] affecting many properties will generate claims all at the same time.
  • [Legislature|Legislative] requirements regarding the [solvency] of an insurance company. Local laws may require insurance companies to take out reinsurance.