Legal Definitions - reassurance

Reassurance is a type of insurance called reinsurance. Reinsurance is when one insurance company transfers all or part of its risk to another insurance company in exchange for a percentage of the original premium. The second insurance company accepts the risk and becomes responsible for paying out claims if they arise.

Reinsurance serves three main purposes:

• It allows insurance companies to take on more risk by increasing their capacity to accept risk.
• It promotes financial stability by helping to absorb the costs of unexpected losses or catastrophic events.
• It strengthens the solvency of an insurance company by helping them meet regulatory requirements for minimum solvency margins.

There are different types of reinsurance:

• Excess reinsurance: The reinsurer assumes liability only for an amount of insurance that exceeds a specified sum.
• Facultative reinsurance: Reinsurance of an individual risk at the option of the reinsurer.
• Flat reinsurance: Reinsurance, especially of marine insurance, that cannot be canceled or modified.
• Treaty reinsurance: Reinsurance under a broad agreement of all risks in a given class as soon as they are insured by the direct insurer.

For example, if an insurance company insures a largeconstruction project, they may transfer some of the risk to a reinsurer. The reinsurer would then be responsible for paying out claims if there were any problems with the project. This allows the insurance company to take on more risk and protects them from financial losses.