Reinsurance
Reinsurance is insurance that insurers buy from other insurers, called reinsurers, so that the reinsurer agrees to pay part of the primary insurer's losses. It lets carriers spread risk, protect capital, and write larger limits than they could retain alone.
Last updated October 13, 2026
How reinsurance works
The NAIC glossary describes reinsurance as a transaction in which a reinsurer agrees to cover all or part of the losses of a primary insurer. The primary insurer is called the ceding company because it cedes part of its risk, and a share of the premium, to the reinsurer. IRMI notes the purpose is greater financial stability and capacity.
Two main structures exist:
- Treaty reinsurance covers a defined class or portfolio of business. The reinsurer automatically accepts qualifying risks under the agreement.
- Facultative reinsurance covers individual risks, negotiated case by case.
Either can be proportional, where premiums and losses are shared in an agreed ratio, or non-proportional, where the reinsurer pays only losses above a set retention, as in excess-of-loss reinsurance. Reinsurers operate in many places, including Bermuda and Lloyd's of London.
Example
A hypothetical carrier wants to offer a $10 million limit on a professional liability policy but prefers to keep $2 million of the exposure. It buys reinsurance for the rest, either on that one policy (facultative) or through a treaty covering its whole book. The policyholder still deals only with the primary carrier for the policy and for any claim.
Common misconceptions
- Reinsurance is not something the insured buys. It is a contract between insurers.
- Policyholders typically have no direct relationship with the reinsurer. Their policy is with the primary insurer, which remains responsible to them under it.
- Reinsurance is different from captive insurance, although a captive may itself buy reinsurance.
- Reinsurance does not change the terms of the underlying policy. Coverage is still decided by the policy wording.
- Being "reinsured" is not a sign that a carrier is weak. Most insurers use reinsurance to manage their exposure.
Reinsurance vs. related terms
- Excess insurance. A company buys excess or umbrella insurance to add limits above a primary policy. An insurer buys reinsurance to protect itself. Excess-of-loss reinsurance can look similar in structure, since it pays above a set retention, but the contract is between insurers and the policyholder is not a party to it.
- Captives. A captive is an insurer owned by the business it insures. It can buy reinsurance, but a captive is not reinsurance, and a reinsurer is not a captive. See captive insurance.
- Retrocession. Reinsurers also buy protection for themselves. That is called retrocession, and it is reinsurance of a reinsurer.
- Managing general agents and fronting. An MGA underwrites on behalf of a carrier, and the carrier's capacity may be backed by reinsurers. In a fronting arrangement, a licensed insurer issues the policy and passes most of the risk to other parties. The buyer sees one policy and one issuing insurer in both cases.
Second example: a quota share
A hypothetical insurer launches a new technology liability program. To grow without putting too much of its capital behind a new line, it buys a quota share treaty. The reinsurer takes an agreed percentage of each policy's premium and of each loss, and the insurer often receives a commission from the reinsurer toward its costs of writing the business. The same insurer also buys an excess-of-loss treaty to cap how much any single claim can cost it. A policyholder sees none of this. The policy, the claim handling and the insurer's obligation to the policyholder stay the same, and the terms of coverage come from the policy wording.
Questions to ask your broker or underwriter
- Who is the issuing insurer, and is it an admitted or a non-admitted carrier?
- What financial strength ratings does the issuing insurer hold, and who supports its capacity on this line, such as a syndicate, an MGA program or a group of reinsurers?
- Is the limit provided by one insurer or by several layers, and does each layer sit with a different insurer?
- If the insurer's reinsurance terms change, could that affect our renewal terms, limits or appetite?
- Who handles claims on this policy, the insurer or a managing general agent, and what authority do they have to settle?
Why it matters for technology, AI, fintech and digital-asset companies
Buyers rarely deal with reinsurers directly, but reinsurance is part of why an insurer can offer a large limit on an emerging risk. When comparing carriers for high limits, ask your broker about the insurer's capacity and financial strength, not only its price. Brokers also use managing general agents and carriers whose capacity comes from reinsurers.
New risk classes such as AI liability, digital-asset custody and frontier hardware depend on specialty insurers and MGAs whose appetite is often tied to reinsurance capacity. When reinsurers reprice or pull back from a class, buyers can see changes at renewal, such as lower limits, higher retentions or narrower wording. In a hard market that effect tends to be stronger, and in a soft market it tends to be weaker, though conditions differ by line. Companies placing large limits on unusual exposures often use the excess and surplus lines market, usually through a wholesale broker. See AI and emerging tech, digital assets and hard-to-place risks for context.
Related terms
Frequently asked questions
What is reinsurance?
Reinsurance is insurance that insurers buy from other insurers, called reinsurers, so that the reinsurer agrees to pay part of the primary insurer's losses. It lets carriers spread risk, protect capital, and write larger limits than they could retain alone.
What is the difference between treaty and facultative reinsurance?
Treaty reinsurance covers a class or portfolio of business under one agreement, and the reinsurer automatically accepts qualifying risks. Facultative reinsurance covers an individual risk and is negotiated case by case, with the reinsurer able to accept, decline, or price each one.
Does reinsurance affect my insurance policy?
Not directly. Your policy is a contract with the primary insurer, and coverage depends on its wording. Reinsurance supports the insurer's capacity behind the scenes, and policyholders typically do not have a direct claim against the reinsurer.
What is a ceding company?
A ceding company is the primary insurer that transfers part of its risk to a reinsurer. It pays the reinsurer a premium for that protection. In some contexts it is also called the cedent or the reinsured.
Why do insurers buy reinsurance?
Insurers use reinsurance to share large or correlated losses, to write more business than their own capital would support, to smooth results from year to year, and to manage exposure to a single event or class. It is a routine part of how most insurers operate.
Can a business buy reinsurance?
No. Reinsurance is a contract between insurers. A business that wants similar protection usually buys excess or umbrella limits, or uses a captive that may itself buy reinsurance. Your broker can explain which structure fits your exposure.
What is the difference between reinsurance and excess insurance?
Excess insurance is bought by a company to add limits above its primary policy. Reinsurance is bought by an insurer to protect its own balance sheet. The structures can look alike, but the buyer, the contract and the parties are different.
Can reinsurance affect my premiums or the limits I can buy?
Indirectly. Reinsurance cost and availability influence how much capacity an insurer can offer and at what price, especially in a hard market. It does not change the terms of a policy once issued, which are set by the policy wording.
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