Reinsurance is a cornerstone of the global insurance market, yet for those new to the industry, it can seem a complex and opaque topic.

In this beginner’s guide, we break it down clearly – what it is, how it works, and why it matters – so you can better understand the role reinsurance plays in managing risk and promoting stability across the insurance ecosystem.

What Is Reinsurance?

Reinsurance is often described as “insurance for insurers.” It is a risk management tool that allows insurance companies (known as the ‘ceding’ companies or ‘cedents’) to transfer part of their liabilities to another insurance company (the reinsurer). This helps insurers manage their exposure to large or unexpected losses.

In simple terms, reinsurance allows an insurer to share the risks it has underwritten, so no single company bears the full financial burden of major claims.

Why Do Insurers Use Reinsurance?

There are several key reasons insurers use reinsurance:

Risk management

Reinsurance allows insurers to protect themselves from major losses, such as natural disasters or large liability claims.

Increased capacity

By transferring some of their risk, insurers can write more policies and take on larger accounts.

Financial stability

Reinsurance helps insurers smooth out fluctuations in claims and maintain consistent performance over time.

Regulatory compliance

In many markets, reinsurance can reduce the capital that insurers are required to hold against their liabilities.

How Reinsurance Works

When an insurer sells a policy, they agree to pay claims if a loss occurs. Reinsurance contracts specify which portion of those claims the reinsurer will take on. This can range from covering specific types of policies to taking a share of an insurer’s entire portfolio.

In the event of a large loss, the reinsurer reimburses the ceding company for the portion of the claim they’ve agreed to cover.

For example, if an insurer sells property insurance and a major fire causes a £10 million loss, the reinsurer might cover £8 million of that claim, helping the insurer stay solvent and continue operating smoothly.

Common Types of Reinsurance

There are several types of reinsurance structures, each with its own purpose and application. Here are the main ones:

Treaty Reinsurance

This is a standing agreement where the reinsurer automatically accepts a portion of all risks that fall within a predefined category (for example, all property policies underwritten by the insurer). Treaty reinsurance is typically long-term and covers a wide range of risks.

Facultative Reinsurance

In facultative reinsurance, each individual risk is underwritten and negotiated separately. This is often used for high-value or complex risks that fall outside standard underwriting criteria.

Proportional Reinsurance

Also known as pro rata reinsurance, this type involves the reinsurer sharing both the premiums and losses with the insurer according to a fixed percentage. For example, a 50/50 proportional treaty means the reinsurer receives 50% of the premium and pays 50% of the losses.

Non-Proportional Reinsurance

In non-proportional (or excess of loss) reinsurance, the reinsurer only pays if losses exceed a certain threshold. This is particularly useful for catastrophe protection or large single events. The insurer retains the first layer of loss, and the reinsurer covers anything above that amount, up to a limit.

The Role of Reinsurance in the Insurance Ecosystem

Reinsurance plays a vital role in supporting a stable and sustainable insurance market. It promotes resilience by helping insurers absorb financial shocks, ultimately protecting policyholders and the wider economy.

By spreading risk across multiple parties, reinsurance also encourages innovation – allowing insurers to offer new products or expand into new markets with greater confidence. It supports globalisation too, enabling local insurers to operate internationally while keeping their risk exposure manageable.

Importantly, reinsurance helps build trust among regulators, policyholders and investors by signalling that insurers are managing their risks responsibly and maintaining sound financial discipline.

While the mechanics of reinsurance can be complex, its purpose is straightforward: to create a more stable, resilient, and flexible insurance market. For newcomers to the industry – whether you’re in underwriting, claims, finance or another support function – understanding the fundamentals of reinsurance can help you see how different parts of the value chain connect and operate.

At MatBlas, we regularly support teams looking to improve their technical knowledge of reinsurance and pricing. Whether through training, consultancy or tools, we help insurance professionals build the confidence and capability to make better, data-informed decisions.