Reinsurance is a financial arrangement in which an insurance company (the ceding company) transfers a portion of its risk exposure to another insurance company (the reinsurer). This process allows the ceding company to manage its risk more effectively by providing additional protection against large claims or unexpected losses.
Reinsurance can take various forms, including:
- Proportional Reinsurance: The reinsurer receives a predetermined percentage of premiums and pays a corresponding percentage of claims.
- Non-proportional Reinsurance: The reinsurer only pays for losses that exceed a certain threshold, known as the retention limit.
The primary purposes of reinsurance are to increase the ceding company's capacity to underwrite policies, stabilize its financial performance, and provide protection against catastrophic losses.
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