At WiseGEEK, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
Reinsurance is the practice of mitigating insurance risks by sharing those risks with another insurance carrier in exchange for paying that other carrier a part of the premium. The practice makes it possible for larger policies to be written, but still have the protected party only deal with the main insurance provider. This simplifies things for the customer and generally does not affect rates. The practice of reinsurance could date back to as early as the 1300s.
Typically, reinsurance is applied to larger insurance policies, but companies may also engage in the practice when they do not specialize in a particular insurance product. For example, if a policy is packaged to include health insurance for employees and worker's compensation insurance, the company bidding may feel more comfortable having some other company handle one of those two divisions. This not only helps to minimize risks to a single company, it also provides the opportunity for a company with more expertise in a certain area to step in and handle those matters.
Despite this apparent benefit, the main reason for reinsurance remains risk mitigation. For example, if a company has a very large policy, or a number of smaller high-risk policies, those policies may generate a great deal of revenue, but could cause a catastrophic liability if a major disaster were to take place. Therefore, for the overall health of the company, it may seek others to share that risk, and pay those companies part of the premium proportionately equivalent to the risk they assume.
While nearly all insurance companies have a reinsurance program, there are some that also specialize in the practice. They specifically seek out other companies who have already sold policies and offer to take on the risk for a certain premium level. These companies may not be well known by name because they are not often in the consumer market, and therefore do not maintain a large public presence. Further, claims may still be paid by the major carrier who first wrote the policy, even if the payment is coming from some other company.
The exact origin of reinsurance is unknown, but the earliest reports date back to the late Middle Ages. Then, companies who focused in insuring maritime voyages sought others to share the risk because of all the unknowns involved. Further, ships and cargo often had very large values for the time, so companies often were not willing to take a risk unless others could step in to share the risks and rewards.