What is reinsurance?
[Life Insurance 101 Series: This series features IMPACT posts that detail the breadth of the industry’s reach and benefits provided to consumers.]
Reinsurance is a risk management tool used by life insurers to spread risk and manage capital.
With reinsurance, a life insurer transfers some of its insurance risk to another insurer. In effect, reinsurance is insurance for insurers.
By transferring and lessening its risk, a life insurer is better able to provide financial protection products to a larger array of people and groups.
In order for families to have peace of mind and for economies to thrive, there must be a mechanism to absorb unexpected, large financial risks. Life insurance serves as a financial shock absorber, spreading risks between millions of customers and life insurers.
Reinsurance spreads the risk further, between life insurers and reinsurers. An individual life insurance customer, or policyholder, will never interact with the reinsurer. But the reinsurer’s presence is part of what makes the system of risk transfer work. Reinsurance helps makes this essential promise by life insurers possible by increasing the amount of business a life insurer can issue, as well as by decreasing the amount of risk that is held in a single insurance company.
The insurer transferring the risk is called the “ceding insurer.” The insurer accepting the risk is called the “assuming insurer” or “reinsurer.”
The ceding insurer transferring the risk retains its financial relationship with, and legal obligation to pay claims to, the policyholder. The policyholder will not even be aware that part of the risk in their policy is covered by a reinsurer. If there is a claim on the policy, the reinsurer reimburses the ceding insurer for its portion of this claim.
A vast majority of life insurers buy reinsurance to improve their risk profile. In 2018, 87 percent of life insurers with life premiums ceded at least some of those premiums as reinsurance. And 49 percent of insurers doing annuity business in 2018 ceded annuity considerations, excluding deposit-type funds.
America’s life insurers use reinsurance to spread their risk. This allows them to do what they do best: provide financial protection products that help their customers build a financial safety net that protects them through all stages of life.