Reinsurance terms, in plain English

Alternative risk transfer (ART) refers to non-traditional ways of financing or transferring risk that go beyond standard insurance and reinsurance, such as captives, insurance-linked securities, and parametric structures.

A bordereau is a detailed report that an MGA, coverholder, or ceding insurer sends to the risk-bearer on a set schedule, listing either the policies and premiums written (a premium bordereau) or the claims and losses (a loss bordereau) for the period.

Captive reinsurance is an arrangement in which a captive insurer, an insurance company created and owned by a parent business or group to insure that group's own risks, participates as a reinsurer, often by assuming risk ceded from a licensed fronting insurer.

The cedent, also called the ceding company, is the insurer that transfers (or 'cedes') part of its risk to a reinsurer in exchange for a share of the premium.

A ceding commission is a payment a reinsurer makes to the ceding insurer under a proportional treaty, reimbursing the insurer for the costs of acquiring and servicing the business.

Cyber reinsurance transfers a portion of an insurer's cyber insurance risk, such as losses from data breaches, ransomware, and business interruption caused by cyber events, from the primary insurer to a reinsurer.

Excess of loss reinsurance is a non-proportional arrangement in which the reinsurer pays losses only above a set retention, known as the attachment point, up to an agreed limit.

Facultative reinsurance is coverage purchased for a single risk or a specific policy, negotiated individually, where the reinsurer can accept or decline each risk it is offered.

A fronting carrier is a licensed, admitted insurer that issues policies on behalf of another party and then transfers most or all of the underlying risk to a reinsurer. It lends its license and paper for a fee while remaining legally responsible to policyholders.

Insurance-linked securities (ILS) are financial instruments that transfer insurance risk to capital-market investors. The best-known example is the catastrophe bond, which pays insurers if a defined disaster occurs.

The loss ratio is losses, and often loss-adjustment expenses, divided by earned premium. It is a core measure of underwriting performance.

A managing general agent (MGA) is a specialized insurance intermediary to which an insurer delegates underwriting authority, allowing it to select and price risks, bind coverage, and sometimes issue policies, adjust claims, or negotiate reinsurance on the insurer's behalf.

Parametric reinsurance pays a predefined amount when an objective, measurable trigger is met, such as a hurricane of a set wind speed or an earthquake above a chosen magnitude, rather than reimbursing the ceding company's actual losses.

Program business refers to specialty insurance built for a narrowly defined group of similar insureds, such as a single industry or class of risk, and usually distributed by an MGA or program administrator that holds delegated underwriting authority from a carrier.

Proportional reinsurance is a pro rata arrangement in which the ceding insurer and the reinsurer share premiums and losses in a set proportion. It includes quota share and surplus share treaties.

A protected cell captive is a captive insurance structure divided into legally separate cells, so each participant's assets and liabilities are ring-fenced from the others.

Quota share reinsurance is a proportional arrangement in which the reinsurer takes a fixed percentage of the premiums and pays that same percentage of the losses on the covered policies.

Reinsurance is insurance for insurance companies. In a reinsurance transaction, one insurer (the reinsurer) agrees to indemnify another insurer for part of the losses it may pay on the policies it has written.

A reinsurance broker, also called a reinsurance intermediary, arranges reinsurance between a ceding insurer and one or more reinsurers. It designs the program, negotiates terms, and places the risk, and it often handles the flow of premiums and claims between the parties.

Reinsurance capacity is the amount of coverage reinsurers are willing and able to provide to insurers. It reflects the capital available in the market to absorb risk.

Reinsurance regulation is the body of laws and rules that governs how reinsurers operate and how a ceding insurer can take financial-statement credit for the reinsurance it buys. In the United States it is set mainly by the states and coordinated through the NAIC.

Reserving is the process of setting aside estimated funds to pay for claims that have already occurred but are not yet fully paid, including claims incurred but not yet reported (IBNR).

A retention limit is the amount of loss a ceding insurer keeps for its own account before its reinsurance responds. It is also called the retention or net line.

Retrocession is reinsurance purchased by a reinsurer. When a reinsurer transfers part of the risk it has assumed to another reinsurer, the transaction is a retrocession and the party accepting that risk is a retrocessionaire.

Specialty reinsurance is reinsurance for niche, complex, or non-standard lines of business that require dedicated underwriting expertise, such as aviation, marine, energy, political risk, and cyber, along with other emerging exposures.

Treaty reinsurance is an arrangement in which a reinsurer agrees to cover a defined class or portfolio of an insurer's policies under a single contract, rather than reviewing each risk one at a time.

Reinsurance is generally described along two dimensions: how risks are arranged (treaty versus facultative) and how losses are shared (proportional versus non-proportional).