What Does Reinsurance Mean?
Reinsurance is insurance meant for insurance companies. Reinsurers take on a portion or all of the risks the ceding insurance company, with many dividing their total risks across several reinsurers. The aim of reinsurance is to reduce the risk of the ceding company becoming insolvent or bankrupt by spreading the risks and costs involve in the insurance business.
Reinsurance is also known as insurance for insurers.
Insuranceopedia Explains Reinsurance
Reinsurance is in essence an insurance company assuming the risks undertaken by another insurance company. The ceding company then pays the reinsurance company a share of the premium paid by its insured. The reinsurer, meanwhile, enters into a bigger risk and becomes liable to the ceding company in the event any of the covered risks take place.
Because the contract is between the ceding company and the reinsurer, the rights of the policyholders are not affected in any way. In other words, the ceding company remains liable to its insured for the claims and benefits that come with their insurance policies.
Having a reinsurance policy decreases the risk of bankruptcy of the reinsured company who may be compelled to pay millions in claims after a major disaster or similar events.
The reinsurer may be a specialist reinsurance company, in other words entirely dedicated to reinsuring insurance companies, or just another insurance company.