What is reinsurance?

Reinsurance is fundamentally an agreement for indemnity among insurers. It involves one insurance company (the reinsurer) providing financial protection to another insurance company (the ceding insurer) by assuming some of its risks, typically related to large or catastrophic events. This arrangement allows the ceding insurer to manage its risk exposure by transferring parts of its liabilities, thus ensuring greater stability and solvency.

In this structure, the reinsurer receives premiums from the ceding insurer in exchange for taking on these risks, which can include both catastrophic losses and everyday claims. This sharing of risk helps insurance companies maintain their ability to pay claims while managing capital more effectively, ultimately benefiting consumers by promoting the health of the insurance market.

The other options do not accurately describe reinsurance. A policy endorsement is a modification or addition to an existing insurance policy. Insurance against environmental hazards pertains to specific coverage related to damage from environmental concerns. Coverage for personal liabilities is focused on an individual’s personal legal liabilities and does not involve the complex risk-sharing functions of reinsurance. Each of these alternatives represents different insurance concepts rather than the specific arrangements that exist in reinsurance agreements.