The simplest definition of reinsurance is that it is “insurance for insurance companies.” In the global insurance industry, reinsurance is a vital mechanism that helps insurance companies honor claims while ensuring that they remain solvent.
In this article, Insurance Business delves into the different types of reinsurance. We will discuss relevant topics like how reinsurance works, how many types of reinsurance there are, which insurance companies that offer reinsurance, and more.
These are the eight main types of reinsurance that dominate the market. These are:
Let's go over them one-by-one in the succeeding sections.
This is categorized as a standing agreement where the reinsurer agrees to cover the risk of a broad group of policies or an entire line of business. In this agreement, the reinsurer covers multiple policies over a defined period. Treaty reinsurance can be further subdivided into two forms, proportional and non-proportional:
In this setup, the reinsurer and insurer share the premiums and claims in a pre-arranged ratio. Proportional treaty reinsurance agreements are of two types:
In this type of reinsurance, the reinsurer pays only when claims exceed a specific, predetermined amount. There is another sub-category for this reinsurance:
Treaty reinsurance is typically used when an insurance company wants to manage a large volume of similar risks automatically and consistently, without needing to negotiate coverage for each individual policy.
A recent example of how treaty insurance applies is the story of how Enact Holdings entered into quota share treaty reinsurance agreements for 2025 and 2026. The deal involved ceding about 27 percent of expected new mortgage insurance written to a panel of highly rated insurers to enhance risk management and capital efficiency.
This form of reinsurance is one where the reinsurer has the option to accept or reject the risk of each individual insurance policy. Facultative reinsurance is generally used to insure large, unusual, or complex risks that are not ordinarily covered by treaty reinsurance contracts.
Good examples of this are reinsurance contracts to cover the risk of a large commercial building or a highly valuable piece of art. You can read our guide to gain a deeper understanding of the differences between facultative and treaty reinsurance.
Facultative reinsurance is applicable whenever an insurer needs coverage for a specific risk or a defined package of risks. The risks are for unusual, high-value items that do not fit broader treaty agreements. A facultative reinsurance contract is usually a one-time, case-by-case transaction where the reinsurance company has the option to accept or reject the risk after doing its own underwriting.
In a recent report from WTW, evolving market dynamics showed that insurers are increasingly using facultative reinsurance as a means of managing risk, capacity, and capital, amid shifting market conditions.
If a primary insurer can have a reinsurer, then the reinsurer can likewise have a reinsurer to further spread the risk.
Retrocession reinsurance is the insurance for the reinsurer, and this can significantly reduce risk to more manageable levels. An indirect benefit of retrocession reinsurance is that it can indirectly increase the original insurer’s underwriting capacity. As this allows the reinsurer to support more of the insurer’s risk, it enables the original insurer to underwrite more business.
The appropriate circumstances for retrocession reinsurance would be when a reinsurer wishes to further manage and reduce its own risk by transferring a portion of or all the risks it has assumed from primary insurers to another reinsurer.
This added layer of reinsurance helps reinsurers diversify their risk portfolios, manage capital more effectively, and maintain financial stability – even in the face of large or catastrophic financial losses.
The Australian Reinsurance Pool Corporation (ARPC) recently completed its 2025 retrocession program, supplying US$2.15 billion in coverage to safeguard against terrorism-related losses in Australia.
This program supplements ARPC’s net assets and a US$10 billion government guarantee, showing how retrocession is used by reinsurers. This also shows how this type of reinsurance pools to secure large-scale risk protection via diversified retrocession agreements with global reinsurers.
This is reinsurance that protects original insurers from a multitude of claims resulting from catastrophic events, like hurricanes, earthquakes, and floods. These disasters pose unique challenges to insurers due to their high potential for sizeable losses, despite their low frequency.
Because of the likelihood of losses and resulting claims coming in large numbers and huge amounts, insurers who take on disaster risk will choose this reinsurance. Oftentimes, this type of reinsurance is structured as an excess-of-loss reinsurance contract.
Catastrophe reinsurance will likely become more prominent and necessary in the coming years due to climate change. This has contributed to more frequent and more intense catastrophic events, like Hurricane Ian in 2022 which pummeled Southwest Florida, causing about $112 billion worth of damage.
Catastrophe reinsurance is useful in instances where an insurance company faces potential large-scale losses from rare but severe events. These events would cause widespread damage and a multitude of claims simultaneously, and include disasters like hurricanes, floods, and earthquakes. Human-made disasters like riots and terrorist attacks fall under this category as well.
A recent report showed that in the 2025 reinsurance renewal season premium prices have increased for catastrophe reinsurance coverage. According to Faris Re, reinsurers are taking a more conservative approach for 2025 renewals due to the rising severity and frequency of hurricanes, wildfires, and floods.
These events have led to reinsurers reassessing their catastrophe risk models and increasing their premiums to mitigate volatility.
Loss-occurring reinsurance covers losses that happen only during the reinsurance contract period. This is regardless of when the insurance policy was written or when it was renewed. The primary focus of this form of reinsurance is on the timing of the loss event itself, and not the inception date of the insurance policies.
This type of reinsurance is applicable when an insurer or reinsurer wants coverage for claims arising from events that have already happened during the reinsurance contract period. Key situations leading to the use of loss-occurring reinsurance include managing known or incurred but not reported (IBNR) claims.
The purpose of retroactive coverage is portfolio stabilization and meeting solvency and regulatory requirements.
In a recent report concerning the California wildfires, RenaissanceRe explained the ways in which reinsurers like them would likely absorb the losses. This would be achieved most notably via catastrophe excess-of-loss towers where wildfire is a covered event.
While these wildfire losses will exceed retentions of many nationwide insurers, some treaty language may enable insurers to treat the fires as two separate events – prompting them to take two retentions.
In this type of reinsurance, the reinsurer assumes responsibility for claims arising from insurance policies that are either issued or renewed during the effective period of the reinsurance contract.
What this means is that the reinsurer covers all risks attached to policies written within the contract period, regardless of the date of the actual loss or when the claim occurs. The reinsurer handles coverage even if these events occur after the reinsurance agreement has lapsed.
Risk-attaching is valuable for insurers looking to ensure seamless protection for their underwriting activities during a specific period. The policy is warranted when automatic, comprehensive coverage is needed for all new and renewed policies within the contract period.
This type of reinsurance is also useful for providing protection from future claims of policies issued within the treaty term, supporting growth for underwriting, simplifying risk management for complex portfolios, and creating stability in financial planning and capital management.
There’s a property risk success story that occurred in Munich Re, which intervened at the last minute to provide temporary risk-attaching reinsurance for a two-month period. This allowed the insurer to maintain full coverage for all policies issued or renewed during that time. Munich Re’s solution gave the insurer and broker enough time to complete the renewal program without gaps in coverage.
For this type of reinsurance, the original insurer is protected when total claims made in a certain period go beyond a specific limit. Aggregate excess-of-loss reinsurance covers the amount that exceeds this limit, allowing the original insurer to manage multiple losses over time.
Since aggregate excess-of-loss reinsurance caps potential losses beyond a set threshold, the original insurer’s ability to manage risk supports regulatory compliance. Capital reserves are also safeguarded. This reinsurance type promotes greater financial stability and resilience, giving insurers the opportunity to focus on growth without worrying about the impact of excessive claims.
This type of reinsurance is useful for insurers or self-insurers who want to protect against unexpectedly high total losses from multiple claims, rather than individual large losses.
One example is that of Unipol. The Italian insurance and financial services group Unipol is planning to secure new aggregate reinsurance cover in 2025. This is done to better safeguard its earnings against smaller and more frequent and severe weather events and catastrophes.
Proportional reinsurance is an arrangement where the reinsurance company and the original insurer share losses and premiums in a predetermined proportion. Based on the agreed-upon percentage, both parties share the risks and rewards. The reinsurer then receives a fixed share of the premiums while paying the same share in claims.
Meanwhile, in non-proportional reinsurance, the reinsurer covers losses occurred only if they exceed a specific amount called the retention or priority. Although the reinsurer does not share premiums proportionally, they pay for losses above the insurer’s retention limit, thereby having protection against large or catastrophic claims.
Proportional reinsurance is useful when the insurer wants predictable risk sharing and claims handling support. Meanwhile, non-proportional reinsurance is preferred when the insurer wants protection against rare, severe losses, rather than sharing all the risks.
A study from the Society of Actuaries cites how proportional reinsurance is used by insurers and health plans to manage the amount of capital they need to meet regulatory requirements. Proportional reinsurance in this case helped them stay financially healthy and support their growth.
As for non-proportional reinsurance, this type of reinsurance, more specifically excess-of-loss treaties, is widely used by insurers to protect against catastrophic losses that go past their retention limits. Many insurers globally have increased their reliance on excess-of-loss reinsurance to cover property catastrophe risks.
Reinsurance is a risk management tool used by insurance companies to cushion themselves against large, unexpected losses. Such losses can arise from catastrophic events affecting their insureds – like earthquakes and other natural disasters that in turn trigger widespread claims.
The reinsurance process involves an insurance company which assigns all or part of the risk to another insurance company. Reinsurance is a contractual agreement, where the insurance company that assigns risk is known as the ceding company or cedent. The insurance company that takes on the cedent’s risk is the reinsurer.
Here’s a breakdown of the main components of the reinsurance process:
The original insurer or cedent draws up a contract with a reinsurer. In this agreement, the reinsurer agrees to assume a portion or the entire risk associated with certain insurance policies issued by the cedent.
As payment for taking on the risk, the reinsurer receives a share of the premiums paid by policyholders to the ceding insurance company.
Should large claims arise, and they are covered by the reinsurance contract, the reinsurer proceeds to pay all or part of the claims amount, depending on their reinsurance agreement.
Reinsurance is an essential tool that can ensure the stability and growth of the insurance industry. With reinsurance, smaller insurers can offer coverage for risks that would ordinarily be too large for them to handle themselves.
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