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What is Reinsurance?

Reinsurance, in simple terms, is the practice whereby an insurer seeks to protect itself against certain losses by “reinsuring” a portion of a risk with a “reinsurer” for a share of the premium. Reinsurance occurs on risks where the exposure, a combination of the likelihood and potential size of any loss, is considered too great. It is also used by insurers to protect an entire book of business of a certain type where insurers and reinsurers agree up front the type and nature or risk will be covered by the “treaty” between them.

Reinsurance does not change the relationship between the policyholder and the insurer with whom they have effected the insurance, and this insurer is responsible directly to the policyholder for all claims that are payable under the policy.

In real terms, the biggest effect that reinsurers have on policyholders in general is that their performance and profitability has an impact on the availability and cost of reinsurance, and this consequently can drive the premiums available from insurers in general.

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