Reinsurance is an insurance arrangement in which one insurer transfers part of its accepted risk to another insurer.
The insurer purchasing protection is commonly called the cedent or ceding insurer, while the company accepting the transferred risk is the reinsurer. Reinsurance can help an insurer manage large individual exposures, catastrophe accumulations, capital requirements, and fluctuations in claims.
Two broad structures are treaty reinsurance and facultative reinsurance. Treaty arrangements cover categories of business under an agreement, whereas facultative reinsurance is negotiated for an individual risk or specific policy. Reinsurance may also be proportional or non-proportional, depending on how premiums and losses are shared.
Reinsurance does not usually create a direct contract between the policyholder and the reinsurer. The original insurer generally remains responsible to its policyholder even when it has transferred some financial risk behind the scenes.