Reinsurance is a transaction whereby one insurance company
(the “reinsurer”) agrees to indemnify another insurance
company (the “reinsured, “cedent” or “primary” company)
against all or part of the loss that the latter sustains under
a policy or policies that it has issued. For this service, the
ceding company pays the reinsurer a premium.
The purpose of reinsurance is the same as that of insurance:
to spread risk. Reinsurance helps protect insurers against
unforeseen or extraordinary losses by allowing them to
spread their risks. For example, a catastrophic fire at an
industrial enterprise could financially devastate its insurer.
With reinsurance, no single insurer finds itself saddled with a
financial burden beyond its ability to pay.