Reinsurance

Reinsurance

Reinsurance is essentially the insurance of insurance, purchased by an insurer or reinsurer to protect against its exposure under policies that it has underwritten.

Reinsurance enables an insurer to pass on all or part of risks that it has underwritten. By doing so, the purchaser of reinsurance is able to:

1. •

   increase its capacity to accept new business, enabling it to accept more or larger risks by freeing up capital that it would otherwise be needed for reserves

2. •

   mitigate the severity of its exposure to particular losses by spreading risks over a wider capital base

3. •

   strengthen its solvency and comply with regulatory minimum solvency margin requirements, or to achieve a more favourable credit rating, making it more attractive to customers and business partners

4. •

   protect the interest of its policyholders, if it is a direct insurer, or the policyholders of the direct insurer, if the purchaser is itself a reinsurer (also called a retrocessionaire)

Reinsurance is also used in ‘fronting arrangements’, whereby a ‘fronting’ direct insurer cedes all or nearly all