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Reinsurance is insurance that is purchased by an insurance company from one or more insurance companies (the "reinsurer") directly or through a broker as a means of risk management, sometimes in practice including tax mitigation and other reasons described below. The ceding company and the reinsurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay a share of the claims incurred by the ceding company. The reinsurer is paid a "reinsurance premium" by the ceding company, which issues insurance policies to its own policyholders.
A healthy reinsurance marketplace helps ensure that insurance companies can remain solvent (financially viable), particularly after a major disaster such as a major hurricane, because the risks and costs are spread.
There are two basic methods of reinsurance:
- Facultative Reinsurance
- Treaty Reinsurance
Why reinsurance is important?
When insurers insure a risk again, it's called reinsurance. Insurers spread the costs of paying out on large risks by reinsuring part of what they have agreed to insure with other reinsurers. This 'spread' means that the loss incurred by each individual insurer is not as severe.
What is a cedant reinsurance?
A party to an insurance contract who passes financial obligation for certain potential losses to the insurer. In return for bearing a particular risk of loss, the cedent pays an insurance premium. The term cedent is most often used in the reinsuranceindustry, although the term could apply to any insured party.
How does a reinsurance work?
Reinsurance as "insurance for insurance companies" allows the primary or direct insurer to lock into the capital resource of a reinsurer, to lay off underwritten risks in order to reduce volatility and to increase the spread and volume of the risk portfolio and (thus) to increase profitability.
What is the meaning of ceding company?
DEFINITION of 'Ceding Company' An insurance company that passes the part or all of its risks from its insurance policy portfolio to a reinsurance firm. Passing off risk in this manner allows the ceding company to hedge against undesired exposure to loss and frees up capital to use in writing new insurance contracts.
What is the meaning of retrocession?
Retrocession is the practice of one reinsurance company providing services to another by insuring the activities of another reinsurance company. This is done by accepting business that the other company had agreed to underwrite.