Reinsurance is insurance for insurance companies.
When customers purchase insurance, they are transferring their risk to an insurance company. Insurers have lots of risk, and therefore, they need insurance to protect themselves against having too much risk. This insurance is called reinsurance. Normally the insured is unaware that an insurer has purchased reinsurance.
With reinsurance, there are two insurance companies involved:
- Originating company (also called a ceding company) — this is the insurer that sells the policy (or policies) to the customer and then cedes (transfers) some of the risk to a reinsurer.
- Reinsurance company (also called a reinsurer or assuming company) — this is the insurer that assumes (takes) the risk.