what is reinsurance ceded 
reinsurance ceded is an insurance industry term that refers to the portion of risk that a primary insurer passes to another insurer that other insurer is often a specialist in reinsurance this practice allows the primary insurer to limit the overall risk exposure that it takes on with its clients the primary insurer is referred to as the ceding company while the reinsurance company is called the accepting company the accepting company receives a premium paid by the ceding company in exchange for taking on the risk reinsurance is sometimes called stop loss insurance the practice allows an insurance company to put a cap on the maximum losses it may sustain in a worst case scenario understanding reinsurance cededthe reinsurance process allows insurance companies to protect themselves against the possibility of a claim for catastrophic damages that would be beyond their financial resources a worst case scenario like a major hurricane could otherwise be devastating by offloading some portion of the overall risks they underwrite the insurance company reduces its overall risk and is able to keep premium costs lower for all of its clients the agreement between the ceding company and the accepting company is called the reinsurance contract and it covers all terms related to the ceded risk the contract outlines the conditions under which the reinsurance company will pay out claims the accepting company pays a commission to the ceding company on the reinsurance ceded this is called a ceding commission and covers administrative costs underwriting and other related expenses the ceding company can recover part of any claim from the accepting company reinsurance is often written by a specialist reinsurance company the biggest names globally in reinsurance include swiss re ltd berkshire hathaway inc and reinsurance group of america inc 1some reinsurance is handled by insurers internally automobile insurance for example by diversifying the types of clients the company takes on in other cases such as liability insurance for a large international business a specialty reinsurer may be necessary because diversification is not possible an insurer may multiply the ceding and reinsurance process to create a portfolio whose claims values fall below the premiums and investment income the company generates types of reinsurance contractsthere are two types of reinsurance contracts used for reinsurance ceding facultative reinsurance and the treaty reinsurance contract in a facultative reinsurance contract each type of risk that may be passed to the reinsurer in exchange for a premium is negotiated individually the reinsurer can reject or accept individual parts of a contract proposed by the ceding company or can accept or reject the contract in its entirety with a treaty reinsurance contract the ceding company and the accepting company agree on a broad set of insurance transactions that are covered by reinsurance for example the ceding insurance company may cede all of the risks for flood damage and the accepting company may accept all flood damage risks in a particular geographic area such as a floodplain munich re group is the world s largest reinsurer or recipient of ceded insurance as of 2022 with net premiums of approximately 43 1 billion according to statista 2benefits of reinsurance cededthe insurance industry by definition is exposed to an unusual degree of risk the process of reinsurance ceded keeps the industry stable that is it allows individual insurers to manage earnings volatility and maintain adequate capital reserves in any business those are keys to success 3reinsurance also allows an insurer the freedom to underwrite policies that cover a larger volume of risks without excessively raising the costs of covering their solvency margins or the amount at which the assets of the insurance company at fair values exceed its liabilities and other comparable commitments reducing risks through reinsurance frees up substantial liquid assets that an insurer needs to keep on hand in case of unexpected claims for the client the reinsurance ceded process lifts an administrative burden the client does not have to shop for multiple insurers to take on different types of risks or different levels of protection for its business operations the process is handled among insurers 4challenges to reinsurance cededreinsurance contracts are negotiated on a case by case basis and have grown increasingly complex according to deloitte a professional services advisory firm in a report modernizing reinsurance administration the company notes that many large insurers are taking on and administering literally thousands of reinsurance contracts it argues that many companies have not adequately updated and integrated their data technology systems in order to handle these complex demands effectively 5the main challenge for the reinsurance industry is of course the utter unpredictability of catastrophic events the covid 19 pandemic for example presents an unprecedented challenge to certain specialty reinsurers such as those in the business of protecting against losses in the travel industry and the convention business 6regulation of reinsurance cededthe insurance industry in the u s is regulated mostly at the state level that means that an insurance company must abide by the regulations of the individual states in which it does business the responsibilities are multiplied of course in a global business environment the reinsurance industry by contrast is not as heavily regulated reinsurers do not deal directly with policyholders so consumer protections do not necessarily apply nevertheless reinsurers must be licensed as insurers in each state in which they do business they also must abide by the regulations and financial reporting requirements of each jurisdiction 7questions answers