Reinsurance is insurance purchased by an insurance company from another insurer to transfer part of its risk, stabilize underwriting results, and protect against large or catastrophic losses. It is the principal mechanism by which primary insurers expand the effective size of their risk pools across multiple balance sheets. Reinsurance can be arranged as a treaty, an automatic agreement covering a defined portfolio or class of risks with the reinsurer bound on all eligible business, or as facultative reinsurance, in which individual risks are offered on a case-by-case basis and the reinsurer may accept or decline each.
The two broad structures of reinsurance are proportional and non-proportional. In proportional arrangements, premiums and losses are shared in the same proportion. Quota share reinsurance transfers a fixed percentage of every risk in a defined class to the reinsurer. Surplus share reinsurance has the reinsurer take a portion of each risk above the ceding company's retained line, up to a stated surplus limit, so coverage varies by risk size. In non-proportional arrangements, the reinsurer only covers losses exceeding a specified threshold. Excess of loss reinsurance covers losses on a single risk above a retention amount, protecting the cedant from large individual losses. Stop-loss reinsurance protects the primary insurer against unexpectedly high frequency or severity of losses over a period, triggered when aggregate losses exceed a predetermined threshold.
Several technical features describe how layers of coverage are constructed. The attachment point is the loss amount at which reinsurance begins to respond. A layer is the horizontal band between an attachment point and a ceiling, with multiple layers stacking into a tower. A reinstatement provision restores the limit of an excess-of-loss contract after a covered loss, allowing the same layer to respond to subsequent events. A bordereau is the periodic report submitted by the cedent to the reinsurer summarizing premiums written, losses paid, and outstanding reserves. Retrocession is reinsurance purchased by a reinsurer to cede part of its assumed risk to other reinsurers, essentially reinsurance of reinsurance. Reinsurance pools allow multiple insurers to share unusual or catastrophic exposures. A loss portfolio transfer cedes a block of past liabilities from one insurer to another for a premium. Adverse development cover protects against upward revisions to loss estimates on prior accident years. Fronting arrangements let a licensed insurer issue a policy on behalf of a non-admitted or captive insurer, then cede 100% of the risk via reinsurance. Alternative risk transfer techniques, including captive insurers, risk retention groups, purchasing groups, and finite risk programs, extend similar risk-sharing concepts outside the conventional market.