What Does Reinsurance Mean?

It is a common practice among insurance companies who would like to decrease the risks associated with insurance claims. By appealing to reinsurance, insurance companies transfer a part of the risk portfolio to a third party, in return for giving this party a portion of the accumulated money from the insurance premium-payments.

So reinsurance is a legal agreement which reduces the risks of having to pay a lump sum in order to meet the requirements of an insurance claim. By distributing the risks associated with insurance policies to alternative institutions, both insurance and reinsurance companies have something to gain. Insurers reduce their risks, while reinsurers make some money.

This insurance product used by insurers is also called ‘stop-loss insurance’.

Reinsurance Explained

To understand this option one may look at it from the reinsurance company’s point of view. This party will be obliged to provide part of the larger coverage in return for an appropriate sum of money based on the value of the original contract.

One should know that the insurer who diversifies the offered insurance portfolios is called ‘the ceding party’, while the company accepting a part of possible future obligations is called the reinsurer.