Reinsurance Ceded

What it is

Reinsurance ceded is the portion of risk a primary insurer transfers to another insurer (a reinsurer) to reduce its overall exposure. The original insurer is the ceding company; the reinsurer is the accepting company. In exchange for taking on risk, the reinsurer receives a premium. Reinsurance is often described as “stop‑loss” protection because it helps cap potential losses from catastrophic events.

How it works

The ceding company and the accepting company sign a reinsurance contract that specifies which risks are ceded and the conditions for payment.
The ceding company pays a premium to the reinsurer and may receive a ceding commission to cover administrative and underwriting expenses.
When a ceded claim occurs, the reinsurer pays all or part of the amounts defined in the contract, allowing the ceding company to recover part of the loss.
The ceding company remains the policyholder’s point of contact.

Main types of reinsurance contracts

Facultative reinsurance
Each risk or policy is negotiated individually.
The reinsurer can accept or reject individual risks.
Treaty reinsurance
Covers a broad class of risks under a standing agreement.
The reinsurer accepts predefined categories (e.g., all flood risks in a region) without individual underwriting.

Common treaty structures

Quota share (proportional): The insurer and reinsurer share premiums and losses in a fixed percentage.
Surplus share (proportional): The insurer retains liability up to a predetermined amount; amounts above that are ceded to the reinsurer.

Key metrics and terms

Ceding commission: Paid by the reinsurer to the ceding company to cover acquisition and administration costs.
Ceded loss ratio: Ratio of losses paid (or expected to be paid) on ceded business to ceded premiums — a measure of how much risk/premium is transferred to reinsurers.
Reinsurance contract: Legal agreement defining scope, premiums, claims sharing, exclusions, and reporting.

Benefits

Reduces volatility from large or catastrophic claims and helps maintain solvency.
Frees capital and liquidity, enabling insurers to write more or larger policies.
Allows insurers to underwrite risks they otherwise could not retain efficiently.
Simplifies risk management for clients because insurers arrange reinsurance behind the scenes.

Challenges

Complexity: Large insurers may manage thousands of reinsurance contracts, creating operational and data‑integration challenges.
Catastrophe unpredictability: Events like major storms or pandemics can strain reinsurance capacity and models.
Contract negotiation and administration can be resource‑intensive and require robust systems.

Regulation

In the U.S., primary insurance is regulated mainly at the state level; reinsurers also must meet licensing and financial reporting requirements in jurisdictions where they operate.
Reinsurers typically do not deal directly with consumers, so consumer protection rules that apply to primary insurers may be less directly relevant, but financial solvency and reporting standards still apply.

Industry context

Specialist reinsurers dominate the market; major global players include Munich Re, Swiss Re, Berkshire Hathaway Reinsurance, and Reinsurance Group of America (RGA). Some insurers use internal diversification strategies instead of buying external reinsurance for certain lines.

Key takeaways

Reinsurance ceded transfers part of an insurer’s risk to a reinsurer, reducing exposure and stabilizing results.
Contracts are either facultative (risk‑by‑risk) or treaty (broad classes of risk).
Reinsurance supports capacity, solvency, and risk management but introduces operational complexity and relies on accurate catastrophe modeling.
Metrics such as ceded loss ratio and ceding commission help measure and allocate the economic effects of reinsurance.