What is the definition of Reinsurance?

Reinsurance refers to the coverage that the insurance company passes on to other insurance companies. In other words, insurance purchased by insurance companies.

Insurance companies would like to limit their exposure to any one risk. For example, the insurance company who issues a $10 million policy on the life of an individual will be reluctant to take on the full risk, so what it tries to do is to pass on a portion of the risk to other insurers. In return, the reinsurer gets part of the premium received by the insurance company and will reimburse the insurance company for their portion of the claims paid to the policyholder.

In this case, the insurance that passes on the risk is called the primary company. Reinsurance is important since an insurance company effectively increases its capital by reinsuring, thus increasing its capacity to sell coverage.

• Insolvency
• Misstatement of Age or Sex Provision
• Modified Premium Policies
• Moral Hazard
• Comprehensive Coverage