What is reinsurance? Exactly how does it function?

Question

I have a general idea what it is but it always seems complicated to explain. Any help please ?

Answer 1

Re-insurance is Insurance for the Insurance Company.



Lets use homeowner's insurance as an example. ABC Insurance is the retail insurer dealing with the actual homeowner. They get a billion dollars worth of customers. XYZ doesn't want to deal with the marketing and agents working in a retail capasity to get the actual primary insured so they offer insurance to the company that is the retail location. The retailer doesn't want to keep 100% of the risk they have extended so they goto the re-insurance company and pay them a fee to take over x% of their liability. It's just insurance for the insurance company.

Answer 2

Reinsurance is when the insurance company insurers part of the risk to some other insurance company who normally does only reinsurance Business.

Let me explain what I mean part of the risk - Supposing you place a risk of 10 million liability with an insurance company - A. The insurance company A has capacity of paying only 2 million of the risk than the insurance com pay A will keep the first 2 million of the risk and pass on the remaining 8 million to a re insurer for a premium. The deductible kept is higher and the premium rate will be very low since the probability of loss over 2 million is less.

Secondly the insurance company can re-insurer their own whole book of business for catastrophic loss with a reinsurance company.

Answer 3

Reinsurance is insurance that is purchased by an insurance company (the "ceding company" or "cedent" under the arrangement) from one or more other 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.

Answer 4

As the first responder said it's insurance for the insurance company. It's a way for the insurance company to spread a certain risk from just their shoulders to either one or more other insurance companies.



For example, they sell you a $10 million life insurance policy, keep $1 million of the risk and reinsurance $1 million out to 9 other insurance companies. (of course they generally wouldn't do it with such little numbers, but the example still works).

Answer 5

It's insurance cover for insurance companies. It usually takes over when there is a widespread event, for instance tornados, fires or floods. The insurance company will generally have a payout limit, e.g. $100M and anything above this is covered by the reinsurer.

Answer 6

reinsurance, is what insurance companies buy, for "insurance". They sell super big insurance policies to insurance companies, with nice big deductibles, so that if something happens and an insurance company has a $10,000,000 loss, they can submit a $9,000,000 claim to THEIR reinsurance company.