How does reinsurance work?

Reinsurance is a process by which an insurance company transfers a portion of its risk to another insurance company, known as the reinsurer. When an insurer has a large exposure or wants to limit their potential losses on specific policies or for a specific event, they purchase reinsurance. In this way, the reinsurer agrees to pay a portion of the claims of the original insurance company in exchange for a premium. Reinsurance provides the insurer with protection against catastrophic losses, helps to stabilize their financial position, and enables them to underwrite policies with larger limits. It also allows insurers to expand their business beyond their capacity, as they can pass on a portion of the risk to the reinsurer. This mechanism allows for the efficient spreading of risk in the insurance industry.

This mind map was published on 25 July 2023 and has been viewed 79 times.