Legal & Regulatory

Reinsurance

Reinsurance allows primary insurers to limit their exposure to large or catastrophic losses by ceding a portion of premium and liability to reinsurers—enabling them to underwrite more risk than their capital alone could support.

Last reviewed: May 2026 · Editorial methodology

Definition

Reinsurance is a financial arrangement in which a primary insurance company (the 'cedent' or 'ceding company') transfers a portion of its underwriting risk to one or more reinsurers in exchange for a corresponding portion of premium. By ceding risk to reinsurers, primary insurers can: stabilize their loss experience by limiting the impact of large individual claims or catastrophe events; increase their underwriting capacity beyond what their policyholder surplus alone would support; protect against reserve inadequacy; and facilitate market entry in new geographic areas or lines of business. Reinsurance transactions are governed by reinsurance agreements (treaties for ongoing portfolio arrangements, or facultative certificates for individual risks) rather than standard insurance policies, and are typically negotiated directly between the cedent and reinsurer or through a reinsurance broker. Major reinsurers include Munich Re, Swiss Re, Berkshire Hathaway Reinsurance, and Lloyd's syndicates. The global reinsurance market is estimated at over $600 billion in annual premium. Unlike primary insurance, reinsurance is largely unregulated at the state level (though credit for reinsurance in statutory financial statements is subject to NAIC collateral requirements). Reinsurance pricing cycles significantly affect primary insurance market availability and pricing: after major catastrophe years, reinsurance costs rise sharply, directly increasing primary insurer costs and ultimately consumer premiums.

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Tip

Glossary definitions are educational. Always check your own policy language — insurers can define common terms differently from one another. When in doubt, request a written explanation from your agent.

Related terms

Ceded ReinsuranceCeded reinsurance represents the insurance coverage and associated premiums that a primary insurer passes (cedes) to its reinsurers, reducing the insurer's net retained risk.Treaty ReinsuranceTreaty reinsurance is a blanket reinsurance arrangement where the reinsurer automatically accepts all risks within defined parameters from the cedent's book of business, without individual risk-by-risk evaluation.Catastrophe ReinsuranceCatastrophe reinsurance (cat reinsurance) covers the excess losses primary insurers experience when a single event—hurricane, earthquake, wildfire—generates claims far beyond normal expectations, protecting insurer solvency.Policyholder SurplusPolicyholder surplus is the insurance industry's equivalent of stockholders' equity, representing the financial cushion that protects policyholders and enables the insurer to absorb unexpected losses beyond its reserves.RBC (Risk-Based Capital)Risk-Based Capital (RBC) is the NAIC's statutory solvency framework that determines how much capital an insurer must hold, scaled to the types and levels of risk in its business—triggering regulatory intervention when capital falls too low.
Source: Cover Forge USA editorial team|Last verified: May 2026|Methodology
Definitions are educational and may be simplified. Always refer to your policy contract and consult a licensed agent for terms that affect coverage decisions.
CF

Cover Forge USA Editorial Team

Editorial Lead

This article was researched and written by the Cover Forge USA editorial team against federal sources (NAIC, CMS, FEMA, DOL, SSA, state DOIs) and standard policy forms. Bylines organize content by topic — they do not assert individual licensure. See our editorial-policy for details.

Reviewed June 2026

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