Reinsurance is insurance for insurance companies — here is how it works.

TL;DR

• Reinsurance is a contract in which an insurer pays a premium to transfer part of its risk to a reinsurer. The reinsurer helps pay claims when losses are large.
• The insurer in the deal is called the cedent. The reinsurer accepts the ceded risk.
• Treaty reinsurance covers a whole portfolio automatically. Facultative reinsurance covers one specific risk, negotiated case by case.
• Reinsurers buy it themselves — called retrocession. Risk can be passed along a chain before it rests with a final holder.
• The market hardens when reinsurers raise prices or restrict capacity after large losses. The cedent then pays more or retains more risk.
• The major reinsurers are Munich Re, Swiss Re, Hannover Re, SCOR, Berkshire Hathaway Re, and Lloyd's of London.

What reinsurance is

An insurer takes in premium and promises to pay claims. Most years, claims are manageable and the model works. But some years — a bad hurricane, a large earthquake, a wave of cyber attacks — losses are far bigger than normal.

Reinsurance is how insurers protect themselves against that scenario. The insurer pays a premium to a reinsurer. In return, the reinsurer agrees to cover a defined portion of losses when they exceed a threshold, or simply to share a proportion of all losses in a given book of business.

The insurer that buys reinsurance is called the cedent. The risk it transfers is said to be ceded. The reinsurer accepts that risk in exchange for a share of the original premium.

A plain example

State Farm writes property insurance across Florida. It holds billions in exposure to hurricane losses. To cap its downside, State Farm buys a reinsurance contract from Munich Re. The terms might say: Munich Re covers 60 percent of any losses that exceed $2 billion in a given hurricane season.

If the season is quiet, Munich Re keeps the premium and pays nothing. If losses hit $3 billion, Munich Re pays 60 percent of the $1 billion excess — $600 million. State Farm's maximum loss from that layer is contained.

That is a simplified version of a real-world structure, but it captures the logic.

Treaty versus facultative

Reinsurance contracts come in two main forms.

Treaty reinsurance covers an entire portfolio automatically. When State Farm and Munich Re sign a treaty, every property policy in Florida that meets the defined criteria is covered — no individual policy needs to be submitted or approved. Treaties are efficient and are the most common form of reinsurance for standard lines of business.

Facultative reinsurance covers one specific risk, negotiated case by case. An insurer writes an unusually large commercial property — say, a $500 million factory — and wants to offload some of that single exposure. It approaches a reinsurer and negotiates terms for that one policy. Facultative placement takes more effort but gives both sides flexibility on pricing and coverage terms. It is common in large or unusual commercial risks that do not fit neatly into a treaty.

Most reinsurance programs use both. A carrier might use a treaty to cover its standard book and add facultative cover for individual risks that sit outside the treaty's terms.

The two structures within treaty reinsurance

Within treaties, two main structures define how losses are shared.

Proportional (pro-rata) treaties mean the reinsurer shares a fixed percentage of every premium and every loss. If a cedent cedes 30 percent of its book proportionally, the reinsurer takes 30 percent of the premium and covers 30 percent of every claim. The insurer and the reinsurer move in lockstep.

Non-proportional (excess of loss) treaties only trigger when aggregate losses or a single loss exceeds a specified level. The cedent keeps all losses below that threshold. Above it, the reinsurer pays up to an agreed ceiling. This structure is more common for catastrophe protection, where the cedent wants to cap its worst-case outcome rather than share every small claim.

Why insurers buy reinsurance

Three reasons, and they all come back to the same problem: insurers cannot accurately predict when very large losses will cluster.

Capacity. An insurer's ability to write policies is limited by its capital base. Reinsurance frees up capital by reducing the maximum loss the insurer faces from any one event. That lets the insurer write more business than its balance sheet alone would allow.

Earnings stability. A catastrophe year that causes hundreds of millions in losses would devastate an insurer's results without reinsurance. By transferring the peak exposure, the insurer smooths its earnings and avoids the kind of shock that triggers rating downgrades or regulatory scrutiny.

Expertise. Large reinsurers see data from markets all over the world. A cedent buying reinsurance from Munich Re or Swiss Re often gets access to modelling and pricing expertise — especially for rare or complex risks — that the cedent cannot build internally.

Who the major reinsurers are

A handful of companies write the majority of global reinsurance premium.

Munich Re is the world's largest reinsurer by premium. Headquartered in Munich, it operates in property, casualty, and life reinsurance globally and publishes detailed natural catastrophe research that the wider market relies on.

Swiss Re is the second-largest global reinsurer, headquartered in Zurich. It has a large analytical operation and is one of the main market-makers for pricing catastrophe risk.

Hannover Re, based in Hanover, is the third-largest global reinsurer and is known for competitive pricing across a broad range of lines, including structured reinsurance and life.

SCOR is the main French reinsurer and operates globally in both property-casualty and life reinsurance. It is smaller than the German and Swiss players but significant in European and specialty markets.

Berkshire Hathaway Re is Warren Buffett's reinsurance operation. It is distinct from the others in that it takes on extremely large individual risks — sometimes risks no other reinsurer will accept — and prices them at very high margins. It can do this because Berkshire's capital base is enormous and its cost of capital is low.

Lloyd's of London is not a single company. It is a marketplace where around 90 syndicates underwrite insurance and reinsurance. Lloyd's is particularly strong in specialty and catastrophe lines, and it has historically been the market of last resort for unusual or very large risks.

What happens when rates harden

After a run of large losses — major hurricanes, large wildfire seasons, significant cyber events — reinsurers reassess how much they are charging for risk. When they conclude they have been underpriced, they raise rates at the next renewal season. They may also restrict the terms: higher retentions, tighter coverage definitions, or outright refusal to renew certain programs.

This is a hard market. Primary insurers face higher reinsurance costs and often pass them on through higher premiums to policyholders. Some cedents retain more risk than before because buying the same reinsurance coverage now costs too much.

After 2017-2018, when Hurricanes Harvey, Irma, and Maria caused record losses, reinsurance rates rose sharply in catastrophe lines. After the 2020-2021 wildfire years, property cat rates in California-exposed programs hardened again. The cycle repeats.

A soft market is the opposite: plenty of capital chasing reinsurance risk, competitive pricing, broad coverage terms. Soft markets tend to follow years of lower-than-expected losses and attract new capital into the sector.

Retrocession — reinsurers reinsuring themselves

Reinsurers also buy reinsurance. When a reinsurer transfers part of its accepted risk to another company, that is called retrocession. The cedent in a retrocession deal is a reinsurer; the company accepting the risk is a retrocessionaire.

Retrocession allows risk to be spread further, sometimes across many parties and into capital markets through instruments like catastrophe bonds (cat bonds), which transfer peak insurance risk to investors. This means that the original homeowner's hurricane exposure may ultimately sit, in fractional form, on the balance sheets of pension funds and hedge funds — not just insurance groups.

Tools used in the reinsurance workflow

A few specialist platforms handle the data and placement work that reinsurance transactions require.

[Supercede](/tools/supercede) is a reinsurance platform for cedents, brokers, and reinsurers. It cleans up treaty submission data, runs placement workflows, and provides analytics on the underlying risk portfolio. It is built to replace the spreadsheet-and-email process that has historically dominated reinsurance placement.

[Kettle](/tools/kettle) is an AI-native reinsurance MGA focused on wildfire risk. It uses machine learning to model catastrophe exposure at high resolution, then writes reinsurance and E&S property coverage based on that model. It is a narrower tool — California wildfire only — but an example of how AI-native approaches are entering the reinsurance underwriting step.