What is the difference between insurance and reinsurance?

Insurance is a way to manage risks. It is transferring the risk of loss to another party for a specified payment. The insured pays a premium to the insurer and the insurer guarantees that the insured will be compensated should the insured experience a financial loss. Insurance involves a legal contract between the two parties to make sure that both parties are in agreement with the terms they discussed and that they comply with these terms. It is a way for individuals and businesses to be protected from potential financial losses.

Reinsurance can be seen as ”insurance” for insurance companies, a way for insurance providers to manage their own risks. This process involves an insurance company buying insurance from another insurance company, the latter known within the industry as a reinsurance company. The agreement between these two parties is called a reinsurance agreement. The insurance company, which is now referred to as the ceding party, is, by this proces, transferring some of the risks they possess to the reinsurance company. This is the ceding party’s way of putting a limitation to the potential total loss that it may experience in a series of unfortunate events. As payment for sharing the risk of loss, the reinsurance company receives a part of the premium that the ceding party receives from the original insured parties. The majority of insurance companies have reinsurance programs.