Reinsurance
Insurance purchased by insurance companies to protect themselves against large losses or to spread risk. It's essentially insurance for insurers, allowing them to transfer portions of their risk to other insurance companies called reinsurers.
Example
“After Hurricane Katrina, many homeowners' insurance companies relied on their reinsurance policies to help pay the billions in claims they received.”
Memory Tip
Think 'Insurance for Insurance' - when insurers need insurance too, they buy reinsurance.
Why It Matters
Reinsurance helps keep your insurance company financially stable and able to pay claims, even after major disasters. Without reinsurance, insurance companies might become insolvent after large catastrophic events, leaving policyholders without coverage or claim payments.
Common Misconception
Many consumers don't realize reinsurance exists or affects them, thinking they only deal with their primary insurer. Some believe that if their insurer has reinsurance, their claims will be paid faster, when actually reinsurance settlements between companies can sometimes slow the process.
In Practice
ABC Insurance Company writes $100 million in hurricane coverage along the Gulf Coast. To limit their exposure, they purchase reinsurance that covers losses above $20 million. When Hurricane Delta causes $50 million in claims, ABC pays the first $20 million from their own reserves, while their reinsurer pays the remaining $30 million. This arrangement keeps ABC financially stable and able to continue serving policyholders.
Etymology
Coined in the 14th century from 're-' (again) and 'insurance,' literally meaning 'to insure again.' The practice began with maritime insurance in London and expanded to other types of coverage.
Common Misspellings
Compare insurance quotes and save
Related Terms
More in insurance
Other insurance terms you should know
See Also
Need help with spelling?
Instant spelling checker with dialect variants for 2,000+ words.