The practice of one insurance company buying insurance from a second company for the purpose of protecting itself against part or all of the losses it might incur in the process of honoring the claims of its policyholders. The original company is called the ceding company; the second is the assuming company or reinsurer. Reinsurance may be sought by the ceding company for several reasons: to protect itself against losses in individual cases beyond a certain amount, where competition requires it to offer policies providing coverage in excess of these amounts; to offer protection against catastrophic losses in a certain line of insurance, such as aviation accident or polio insurance; or to protect against mistakes in rating and underwriting in entering a new Une of insurance such as major medical.
A type of insurance that insurance companies themselves buy for their own protection. Reinsurance further shares the risk. Health care insurances frequently reinsure themselves for specified, rare, and high priced risks, such as heart transplantation.