FoundationsCore

Reinsurer

Q: On treaty business, what does the reinsurer principally underwrite?

The cedent's portfolio, pricing and management quality — Treaty cessions are automatic, so the reinsurer never sees policies one by one. It is buying into the cedent's underwriting discipline.

Q: The reinsurer above wants to reduce its own peak exposure on this account. Which tool does it use?

Retrocession — When a reinsurer buys protection for its own assumed book, that cover is called retrocession.

The assuming company

The carrier that accepts ceded risk, underwrites portfolios rather than policies, and is paid to be there in the bad year.

Open the interactive version → definition, quiz, structure diagram and progress tracking

Definition

A reinsurer (or assuming company) accepts risk ceded by insurers. On treaty business it underwrites the cedent's portfolio and management, not individual policies — it rarely sees a single application form. Its edge comes from global diversification: an Atlantic hurricane, a Japanese quake and a European motor book do not go wrong in the same week.

Underwrites the cedent as much as the risk: rating adequacy, claims handling, reserving philosophy, growth appetite.
Financial strength rating is its licence to trade — a downgrade can strip it of business overnight.
Manages its own accumulations by buying retrocession and, increasingly, by issuing catastrophe bonds.

Worked example

A reinsurer takes a 15% share of a European property treaty. It never underwrites a single building; it prices the whole book from the cedent's exposure schedules, loss history and rate change.

Scenario · figures in USD

A reinsurer's year on one excess-of-loss account

A reinsurer writes a 100% share of a property per-risk layer for a single cedent. Premium is $40M. It pays 10% brokerage and carries 5% of premium in internal expense.

Premium written	$40M
Losses incurred	$22M
Brokerage (10%)	$4M
Internal expense (5%)	$2M
Loss ratio	55.0%
Expense ratio	15.0%
Combined ratio	70.0%
Underwriting profit	$12M

So whatA 70% combined ratio looks generous until you remember this layer can lose its whole limit in one night. Reinsurance margins are wide precisely because the outcome distribution is not.

Check your understanding

On treaty business, what does the reinsurer principally underwrite?

The cedent's portfolio, pricing and management quality. Treaty cessions are automatic, so the reinsurer never sees policies one by one. It is buying into the cedent's underwriting discipline.

The reinsurer above wants to reduce its own peak exposure on this account. Which tool does it use?

Retrocession. When a reinsurer buys protection for its own assumed book, that cover is called retrocession.

Word problem

The same account renews. Premium falls 15% to $34M as the market softens, brokerage stays at 10% and internal expense at 5%, but losses come in at $27M. What is the combined ratio, and how much rate reduction would have kept it flat at 70%?

Show a hint

Combined ratio = (losses + brokerage + expense) ÷ premium. For the second part, solve for the premium that produces 70% with $27M of losses.

Reveal the worked answer

Expenses = 15% × $34M = $5.1M
Combined ratio = ($27M + $5.1M) ÷ $34M = 94.4%
For a 70% combined with fixed 15% expense ratio, the loss ratio must be 55%
Required premium = $27M ÷ 0.55 = $49.1M
That is 23% above the expiring $40M, not 15% below it

Combined ratio 94.4%. To hold a 70% combined with $27M of losses the reinsurer needed roughly $49M of premium — a 23% rate increase. Accepting a 15% reduction gave away 24 points of margin in a single renewal.