Reinsurance is when insurance companies need to buy insurance for themselves.

It is a form of insurance purchased by insurance companies to lessen the amount of loss an insurer can possibly suffer from an unusual event. For example, Reinsurance protects insurance companies from any disastrous event that would affect their customers and business.  

If an insurance company is at risk of a potential costly event, then that event could cause the company to go bankrupt or shut down if the company are simply unable to cover the loss. For example, there is a disastrous event such as a hurricane and the insurance company were unable to pay the claims resulting from the damage of the hurricane.

Different types of Reinsurance

There are many different reinsurance schemes available, but there are two main categories, and these are listed below.

  • Treaty reinsurance - means that an insurance company will be covered for all or a portion of potential risks, and the cover is effective for a certain amount of time.
  • Facultative cover will insure the insurance company against a specific or individual risk. The specific risk would be evaluated by the underwriter and the underwriter would write a policy accordingly.

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