Reinsurance
Insurance purchased by insurance companies to transfer part of their risk to other insurers.
Reinsurance is the practice of one insurance company (the cedant or ceding company) purchasing insurance from another insurance company (the reinsurer) to transfer a portion of its risk exposure, stabilize underwriting results, manage capital, and protect against large individual losses or catastrophic events. It is essentially 'insurance for insurance companies,' enabling primary insurers to underwrite risks that would otherwise exceed their capacity or capital tolerance.
Reinsurance structures: Treaty reinsurance covers all policies within a defined category automatically, without individual submission—the cedant cedes a specified portion of every policy in the defined class. Facultative reinsurance covers individual risks submitted on a case-by-case basis, used for very large or unusual risks exceeding treaty capacity.
Reinsurance types by loss-sharing structure: Proportional reinsurance (quota share—the reinsurer shares a percentage of premiums and losses; surplus share—the reinsurer takes a percentage of risks exceeding a specified retention); Non-proportional reinsurance (excess of loss—the reinsurer pays losses above a specified retention per occurrence or in aggregate for the year; catastrophe XL—protects against accumulation of losses from a single catastrophic event).
Reinsurance serves multiple purposes: capacity expansion (enabling primary insurers to write larger individual risks); catastrophe protection (limiting aggregate losses from events like hurricanes or pandemics); earnings stabilization (reducing volatility from large individual losses); capital management (transferring risk reduces required capital); and expertise access (reinsurers provide actuarial, underwriting, and claims expertise).
Major global reinsurers include Munich Re, Swiss Re, Berkshire Hathaway Reinsurance, Lloyd's of London syndicates, and Hannover Re. The $450B+ global reinsurance market is concentrated among a few large players with global diversification and deep capital bases.
FAQs
What is a quota share reinsurance treaty?
A quota share treaty requires the cedant to cede a fixed percentage of all premiums and losses from a defined portfolio of business to the reinsurer. If the quota share is 30%, the cedant keeps 70% of each premium and pays 70% of each loss; the reinsurer receives 30% of premiums and pays 30% of each loss across the entire portfolio. The reinsurer often pays a ceding commission to the cedant to cover acquisition and administrative expenses. Quota shares reduce net premium volume (and thus required capital) while providing proportional loss protection. They are commonly used by smaller or growing insurers to manage capital requirements and by cedants seeking capacity for large-book programs.
What is an excess of loss reinsurance treaty?
Excess of loss (XL) reinsurance is non-proportional—the reinsurer pays losses that exceed a specified retention (the cedant's attachment point) up to a maximum limit per occurrence or aggregate. If a cedant has a $1M per-occurrence retention with $10M of XL coverage, losses up to $1M are fully retained; losses between $1M and $11M are paid by the reinsurer. XL reinsurance protects against low-frequency, high-severity events—a single large claim or catastrophic accumulation. Per-occurrence XL protects individual events; aggregate XL (stop-loss) protects when total losses for the year exceed a threshold. XL is more capital-efficient than quota share for catastrophe protection because it only activates for severe losses.
How did COVID-19 affect the global reinsurance market?
COVID-19 had profound impacts on reinsurance: massive business interruption claims challenged the industry's understanding of its exposure (most BI policies excluded communicable disease losses, but litigation challenged exclusions in multiple jurisdictions); the pandemic demonstrated correlated, non-diversifiable risk that reinsurers had not adequately priced; long-tail casualty impacts emerged in workers' comp, professional liability, and event cancellation; and mortality reinsurance experienced above-expected claims. The aftermath drove: explicit communicable disease exclusions in renewal policies, significant rate hardening across property cat and some casualty lines, reduced reinsurer capacity for pandemic-exposed coverages, and the industry's active lobbying for government backstop programs for future pandemic risks similar to TRIA for terrorism.
Related Terms
Underwriting
Process of evaluating, pricing, and accepting or rejecting insurance risk based on applicant characteristics.
Actuarial Analysis
Statistical and mathematical analysis of financial risks using probability and data to price insurance and manage reserves.
Captive Insurance
Insurance subsidiary created by a company to insure its own risks rather than purchasing coverage externally.
Self-Insured Retention
Amount a company pays out-of-pocket per loss before excess insurance coverage begins.
