What is reinsurance?

Reinsurance is a type of insurance for insurance companies themselves. It is a way for insurers to share or transfer part of their risk to another insurance company to protect themselves from large losses.

✅ Simple Definition

Reinsurance is the process by which an insurance company transfers a portion of its risk to another insurance company (called the reinsurer) to reduce the impact of large claims.

✅ Why Reinsurance Exists

To protect insurers from very large claims (like natural disasters).
To stabilize financial performance of the insurer.
To increase the insurer’s capacity to accept more or larger risks.
To protect solvency and ensure they can pay claims.

✅ How Reinsurance Works

Insurance company (ceding company) issues policies to its customers.
To reduce risk, it enters a reinsurance agreement with a reinsurer.
Part of the risk and premium is transferred to the reinsurer.
If a large claim occurs, the reinsurer pays their share of the loss.

✅ Types of Reinsurance

1. Facultative Reinsurance

Covers individual or specific risks.
Reinsurer reviews each risk before accepting.

2. Treaty Reinsurance

Covers a portfolio of policies automatically.
Insurer transfers a predefined portion of all policies to the reinsurer.

✅ Example

An insurance company issues a policy to insure a factory worth ₹100 crore.
To avoid losing too much in case of a fire, it cedes 50% of the risk to a reinsurer.
If a fire occurs, the original insurer pays ₹50 crore, and the reinsurer pays the other ₹50 crore.