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Reinsurance
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 reinsurer is paid a “reinsurance premium" by the
ceding company, which issues insurance policies to its own
policyholders
...

Insurance companies that sell reinsurance refer to the business as
'assumed reinsurance'
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There are two basic methods of reinsurance:
1
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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
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However as they can separately evaluate each risk
reinsured, the reinsurer's underwriter can price the contract to more
accurately reflect the risks involved
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2
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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 "facultativeobligatory" reinsurance)
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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
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Functions of reinsurance
Almost all insurance companies have a reinsurance program
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In the United States, insurance is regulated at the state level, which
only allows insurers to issue policies with a maximum limit of 10% of
their surplus (net worth), unless those policies are reinsured
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 Risk transfer
With reinsurance, the insurer can issue policies with higher limits than
would otherwise be allowed, thus being able to take on more risk
because some of that risk is now transferred to the reinsurer
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Over the years there has been a tendency for reinsurance to become
a science rather than an art: thus reinsurers have become much more
reliant on actuarial models and on tight review of the companies they
are willing to reinsure
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 Income smoothing
Reinsurance can make an insurance company's results more
predictable by absorbing larger losses and reducing the amount of
capital needed to provide coverage
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The income smoothing comes forward as the losses of the cedant are
essentially limited
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 Surplus relief
An insurance company's random writings are limited by its balance
sheet (this test is known as the solvency margin)
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