Reinsurance is insurance for insurers. When an insurer sells you a policy, it keeps the risk on its own balance sheet, then passes a slice of that risk to a reinsurer in return for a premium. The mechanism lets insurers cover far larger losses than their own capital could absorb alone, and it is why a single firm can stay solvent after a bad year of claims.
Why insurers buy reinsurance
An insurer’s capital is finite. A cluster of storms, a wave of ransomware, or one major liability case could exceed what a single balance sheet can pay. Reinsurance caps that exposure. It also smooths results year to year, which keeps the insurer stable and able to keep writing new business.
Reinsurance is not a consumer product. You never buy it directly, but it sits behind almost every policy you hold, quietly backing the promise to pay.
The two main forms
Reinsurance splits into two broad structures.
Treaty reinsurance
A treaty covers a whole class of business automatically. The insurer cedes an agreed share of every policy in that class to the reinsurer. It is efficient and continuous, and it is the backbone of most personal lines such as home and motor.
Facultative reinsurance
Facultative cover is arranged case by case for a single large or unusual risk. A skyscraper, a film production, or a one-off liability might each need its own facultative placement. It is flexible but slower and more costly than a treaty.
Proportional versus non-proportional
Within those structures, the sharing of risk takes two shapes.
- Proportional: the reinsurer takes an agreed percentage of both the premium and the claims, so losses and income are shared in step.
- Non-proportional: the reinsurer pays only once claims pass a set threshold, known as an excess of loss. The insurer keeps the smaller claims and the reinsurer absorbs the spikes.
Most catastrophe cover is non-proportional, because the insurer wants protection from the rare, severe event rather than help with everyday claims.
How this reaches your premium
When reinsurance costs rise, insurers pass at least some of that through to premiums. After a global year of natural catastrophes, reinsurers raise their prices and tighten terms, and the effect trickles down to household and business policyholders in the affected regions. Our analysis of how the UK insurance market is structured explains how cost moves through the chain from reinsurer to insurer to customer.
The health of the reinsurance market is therefore part of your premium, even though you never see the contract. When capacity is ample, cover is cheaper and broader; when it tightens, the squeeze reaches the high street.
Sources
- Insurers — how insurers cede and manage risk.
- Association of British Insurers (ABI) — market and catastrophe data.
- Existing explainer: insurers, brokers, MGAs and underwriters: who does what.
- Existing analysis: how the UK insurance market is structured.