Reinsurance Basics: Insurance for Insurers
An insurer keeps a slice of each risk and passes the rest on. Here is the vocabulary and the Indian rules.
Reinsurance is insurance for insurers. A general insurer that writes the fire cover on a ₹900 crore refinery in Gujarat cannot sensibly carry that whole loss on its own balance sheet. So it keeps a slice and passes the rest to one or more reinsurers, who share premium and claims in return.
The policyholder never sees any of this. The refinery's contract is with the direct insurer alone, and that insurer must pay the full claim even if a reinsurer is slow to pay its share.
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The Core Vocabulary
These are the definitions IRDAI's Re-insurance Regulations use.
- Cedant (ceding insurer)
- The insurer that writes the direct business and passes part of the risk on. Also called the direct or primary insurer.
- Cession
- The part of the risk passed to a reinsurer by the cedant.
- Retention
- The part of the risk the insurer keeps for its own account.
- Retrocession
- A reinsurer passing part of the risk it accepted on to another reinsurer, the retrocessionaire.
- Fronting
- An insurer issuing a policy but ceding most or all of the risk to a reinsurer. Indian insurers must ensure their arrangements are not fronting.
- Ceding commission
- What the reinsurer pays the cedant on ceded premium, to cover the cedant's acquisition and administration costs.
Why Insurers Buy Reinsurance
- check_circleCapacity: write risks far larger than the insurer could carry alone.
- check_circleStability: smooth out results so one bad year does not wipe out profits.
- check_circleCatastrophe protection: guard against a single cyclone or earthquake producing thousands of claims at once.
- check_circleSpread of concentration: limit exposure where many insured properties sit in one industrial area.
- check_circleSurplus relief: support solvency while premium income grows faster than capital.
- check_circleExpertise: reinsurers see risks worldwide and advise on pricing and underwriting of unfamiliar classes.
How India Regulates It
Section 101A of the Insurance Act requires every insurer to re-insure a minimum percentage of the sum assured on each general insurance policy with Indian re-insurers. This is the obligatory cession. IRDAI sets the percentage each year, and the Act caps it at 30%. For 2026-27 it is 4%, all of it placed with GIC Re, with terrorism premium and the nuclear pool excluded.
Beyond that, IRDAI's Re-insurance Regulations require each insurer to keep the maximum retention its finances and risks allow, under a Board-approved retention policy, and to approach Indian re-insurers first when placing the rest.
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Reinsurance, Co-insurance and Double Insurance
Three ways of sharing risk that IC-01 options love to blur.
Reinsurance
Who contracts with the insured
Only the direct insurer
Who shares the risk
The direct insurer and its reinsurers, behind the scenes
Co-insurance
Who contracts with the insured
Several insurers, each for its share, usually led by one
Who shares the risk
Each insurer directly, in agreed proportions
Double insurance
Who contracts with the insured
Two or more insurers, on separate policies for the same risk
Who shares the risk
Contribution decides each insurer's share of a loss
| Arrangement | Who contracts with the insured | Who shares the risk |
|---|---|---|
| Reinsurance | Only the direct insurer | The direct insurer and its reinsurers, behind the scenes |
| Co-insurance | Several insurers, each for its share, usually led by one | Each insurer directly, in agreed proportions |
| Double insurance | Two or more insurers, on separate policies for the same risk | Contribution decides each insurer's share of a loss |
How IC-01 Tests This
Expect definition questions (the amount the cedant keeps is its retention; passing on accepted risk is retrocession), function questions (which purpose protects solvency against a concentration of risk) and contract questions. The favourite trap: "what right does the original insured have against the reinsurer?" None. The reinsurance contract is between the insurer and the reinsurer only.
FAQs
What is reinsurance in simple words?expand_more
Insurance bought by an insurance company. The insurer keeps part of a risk and passes the rest to a reinsurer, which shares the premium and pays its share of claims.
What is retention in reinsurance?expand_more
The portion of a risk the insurer keeps for its own account. Anything above it is ceded to reinsurers.
What is obligatory cession in India?expand_more
The minimum share of each general insurance policy that section 101A requires insurers to reinsure with Indian re-insurers. IRDAI has set it at 4% of the sum insured for 2026-27, placed entirely with GIC Re.
Can a policyholder claim directly from the reinsurer?expand_more
No. The policyholder's contract is only with the direct insurer, which must pay the full claim regardless of what it recovers from reinsurers.
Next steps
- Reinsurance typesarrow_forward
- Solvency marginarrow_forward
- Contributionarrow_forward
- Syllabusarrow_forward
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