Reinsurance

reinsurance: Reinsurance refers to insurance purchased by an insurance company to cover all or part of certain risks on insurance policies issued by that company.

cession: The portion of the risk transferred on an individual policy or contract is known as a cession.

reinsurer: Reinsurer agrees to indemnify another insurance company, referred to as the ceding company.

retrocession: Retrocession refers to the process by which a reinsurance company purchases an insurance scheme from another reinsurance company to cover its risks.

retrocessionaire: A reinsurance company that accepts or takes a retrocession.

reinsurance treaty: The risks transferred and terms of the arrangement are defined in a written legal agreement between the ceding company and the reinsurer; this agreement is commonly known as a reinsurance treaty.

graph LR A(Individual) -- "pays premiums
purchases insurance policies" --> B([Ceding Company]) B -- "provides policy benefits" --> A B -- "pays premiums
sells policy to individual and cedes to reinsurer" --> C([Reinsurer]) C -- "provides policy benefits" --> B C -- "pays premiums
accepts risk from Reinsurer" --> D([Retrocessionaire]) D -- "provides policy benefits" --> C

The Fundamental Principle of Reinsurance

The fundamental principle of reinsurance is that a transfer of an insurance risk occurs.

What drives reinsurance transactions?

The transfer of some level of insurable economic risk drives all reinsurance transactions; otherwise the transaction is financing, not reinsurance.