How is reinsurance defined?

Reinsurance is best defined as the transfer of all or a portion of insurance to another insurer. In the insurance industry, this process allows an insurance company to reduce its risk exposure by sharing the liability associated with certain policies with another insurer. By doing so, the original insurer can protect itself from large losses that may occur due to significant claims, thus enabling better stability and risk management in their overall operations.

When an insurer engages in reinsurance, it might cede a portion of the premiums received to the reinsurer in exchange for taking on part of their risk. This strategy helps insurers maintain solvency and ensures they can meet their obligations to policyholders, particularly in times of high claims volume. Understanding reinsurance is crucial for insurance professionals, as it plays a vital role in the financial health of insurance companies and the broader insurance market.