Definition
Reinsurance is an arrangement by which an insurance company (the cedant) transfers a portion of the risk it has accepted from a policyholder to another insurer (the reinsurer) in exchange for a premium. The policyholder has no direct contractual relationship with the reinsurer.
It is often described as "insurance for insurers". The cedant retains primary responsibility to the policyholder; the reinsurer steps in only in the cedant-to-reinsurer relationship.
How it works
- The policyholder buys a policy from a primary insurer (cedant) and pays a premium.
- The cedant accepts the risk, then separately arranges reinsurance, ceding a share of the risk and premium to a reinsurer.
- The reinsurer receives the reinsurance premium and agrees to reimburse the cedant for its agreed share of any claim.
- When a loss occurs, the policyholder claims from the cedant. The cedant then recovers the reinsurer's share from the reinsurer.
Why insurers use reinsurance
Capacity expansion
A single catastrophic event — earthquake, industrial explosion, major marine casualty — can exceed a primary insurer's own capital. Reinsurance allows it to accept risks it could not otherwise carry.
Risk diversification
A concentrated portfolio (e.g. one industry or one geography) exposes an insurer to correlated losses. Reinsurance distributes that concentration.
Regulatory capital requirements
In Turkey, SEDDK (the insurance and private pension regulator) requires insurers to maintain minimum solvency margins. Ceding risk to a reinsurer reduces net exposure and helps meet those requirements.
Catastrophe / accumulation protection
Policies concentrated in one region can all be triggered by a single natural catastrophe. Non-proportional reinsurance (excess of loss) limits the insurer's aggregate loss from such events.
Types of reinsurance
| Feature | Facultative | Treaty |
|---|---|---|
| Scope | Risk by risk; each policy negotiated separately | Portfolio-wide; all qualifying risks cede automatically |
| Reinsurer's right to decline | Yes — per risk | No — must accept all in-scope risks |
| Use case | Large, unusual or non-standard risks; risks outside treaty | Standard portfolio business; automatic capacity |
| Duration | Single risk / single policy period | Annual (renewable) |
Treaty reinsurance is further split into proportional (quota share, surplus share) and non-proportional (excess of loss) forms.
- Quota share: cedant and reinsurer share every risk at a fixed percentage.
- Excess of loss (XL): the reinsurer pays losses above the cedant's retention up to an agreed limit.
Key terms
Cedant
The primary insurer ceding (transferring) risk. Also called "ceding company".
Reinsurer
The party accepting the ceded risk. Global reinsurers include Munich Re, Swiss Re, Hannover Re and Lloyd's syndicates; Turkish-based reinsurers are licensed by SEDDK.
Retention
The share of risk the cedant keeps for its own account. A higher retention means less reinsurance; a lower retention means more.
Retrocession
When a reinsurer itself cedes a portion of its accepted risk to another reinsurer — effectively "reinsurance of reinsurance".
Slip
A summary document used in facultative placements showing the risk details, proposed terms, premium and conditions. The full policy wording is called the "reinsurance contract" or "treaty wording".
Common misconceptions
Reinsurance does not give the policyholder extra cover
The reinsurance contract is between the cedant and the reinsurer. The policyholder's sole counterparty is the cedant; the policyholder cannot claim directly from the reinsurer (except under rare "cut-through" provisions).
Reinsurance broker vs insurance broker
An insurance broker represents the policyholder. A reinsurance broker represents the cedant (insurance company) in placing reinsurance on the market. Neolife is SEDDK-licensed for both functions.
Sources
- SEDDK — Regulation on Reinsurance Operations in Turkey (seddk.gov.tr)
- Swiss Re Institute — Sigma research reports
- Lloyd's of London — Reinsurance technical guides
- Insurance Act 5684 (Turkey) — Reinsurance and retrocession provisions