What is Reinsurance?

Legal Definition
Reinsurance is insurance that is purchased by an insurance company (the "ceding company" or "cedent" or "cedant" under the arrangement) from one or more other insurance companies (the "reinsurer") directly or through a broker as a means of risk management, sometimes in practice including tax mitigation and other reasons described below. The ceding company and the reinsurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay a share of the claims incurred by the ceding company. The reinsurer is paid a "reinsurance premium" by the ceding company, which issues insurance policies to its own policyholders.

The reinsurer may be either a specialist reinsurance company, which only undertakes reinsurance business, or another insurance company. Insurance companies that sell reinsurance refer to the business as 'assumed reinsurance'.

A healthy reinsurance marketplace helps ensure that insurance companies can remain solvent (financially viable), particularly after a major disaster such as a major hurricane, because the risks and costs are spread.

There are two basic methods of reinsurance:

  1. Facultative Reinsurance, which is negotiated separately for each insurance policy that is reinsured. Facultative reinsurance is normally purchased by ceding companies for individual risks not covered, or insufficiently covered, by their reinsurance treaties, for amounts in excess of the monetary limits of their reinsurance treaties and for unusual risks. Underwriting expenses, and in particular personnel costs, are higher for such business because each risk is individually underwritten and administered. However, as they can separately evaluate each risk reinsured, the reinsurer's underwriter can price the contract to more accurately reflect the risks involved. Ultimately, a facultative certificate is issued by the reinsurance company to the ceding company reinsuring that one policy.
  2. Treaty Reinsurance means that the ceding company and the reinsurer negotiate and execute a reinsurance contract under which the reinsurer covers the specified share of all the insurance policies issued by the ceding company which come within the scope of that contract. The reinsurance contract may oblige the reinsurer to accept reinsurance of all contracts within the scope (known as "obligatory" reinsurance), or it may allow the insurer to choose which risks it wants to cede, with the reinsurer obliged to accept such risks (known as "facultative-obligatory" or "fac oblig" reinsurance).

There are two main types of treaty reinsurance, proportional and non-proportional, which are detailed below. Under proportional reinsurance, the reinsurer's share of the risk is defined for each separate policy, while under non-proportional reinsurance the reinsurer's liability is based on the aggregate claims incurred by the ceding office. In the past 30 years there has been a major shift from proportional to non-proportional reinsurance in the property and casualty fields.
-- Wikipedia
Legal Definition
Mar. contr. An insurance made by a former insurer, his executors, administrators, or assigns, to protect himself and his estate from a risk to which they were liable by the first insurance.

2. It differs from a double insurance (q. v.) in this, that in the latter cases, the insured makes two insurances on the same risk and the same interest.

3. The insurer on a re-insurance is answerable only to the party whom he has insured, and not to the original insured, who can have no remedy against him in case of loss, even though the original insurer become insolvent, because there is no privity of contract between them and the original insured. 3 Kent, Com. 227; Park. on Ins. c. 15, p. 276; Marsh. Ins. B. 1, c. 4, s. 4
-- Bouviers Law Dictionary
Legal Definition
Insurance of an insurer; a contract by which an insurer procures a third person (usually another insurance company) to insure him against loss or liability by reason of the original insurance. Civ. Co.de Cal. § 2646; Insurance Co., v. Insurance Co.., 38 Ohio St. 15, 43 Am. Rep. 413.
-- Black's Law Dictionary
Legal Definition
A contract of reinsurance ls one by which an insurer procures a third person to insure him against loss or liabllity by reason of such original insurance. Civ. Code Cal. § 2646. And see People v. Mlller, 177 N. Y. 515, 70 N. E. 10; Iowa I Ins. Co. v. Eastern Mut. L. Ins. Co., 64 N. J-Law, 340, 45 Atl. 762; Chalaron v. Insurance Co., 48 La. Ann. 1582, 21 South. 267, 36 I. R. A. 742; Philadelphia His. Co., v. Washington Ins. Co., 23 Pa. 253.
-- Black's Law Dictionary
Legal Definition
A contract whereby an insured, for prudential or other reasons, relieves himself of liability and transfers it to a new insurer. See 45 Am. St. Rep. 442, note.
-- Ballentine's Law Dictionary