What Does Life Reinsurance Mean?
Life Reinsurance is an insurance practice where one insurance company purchases its own insurance contract to insure themselves against a significant loss to a large group of their current life insurance clients' policies.
This is often done if there is a significant portion of their business that could be a risk due to a similar loss event. The second insurance company or reinsurance company accepts this new risk and agrees to reimburse them for the portion of any claim that was originally reinsured against.
The original insurance company that is purchasing the reinsurance is called the primary insurer and "ceding insurance company;" the second insurance company that is issuing the reinsurance is called the "reinsurer."
In some cases, a reinsurer may also purchase their own reinsurance policy on some portion of the risk it has just taken on from the ceding insurance company.
Insuranceopedia Explains Life Reinsurance
Life insurance is a risky and unpredictable business. Insurance companies are exposed to a range of risks including having too many policies of one type.
Like most insurance policies, reinsurance coverage protects the insured from the devastating financial losses that occur with unknown diseases or natural disasters. When multiple insurance companies purchase insurance policies from the same reinsurer they share the risk and limit their own total loss in the case of a specific event or disaster.
Insurers generally purchase reinsurance for the following reasons:
- To limit liability on a specific risk.
- To stabilize their losses.
- To protect themselves against catastrophes.
- To increase their capacity to take on new clients.
The practice of reinsurance helps in keeping premiums low for clients and allowing insurance companies to remain in business when losses are widespread in their area.