What is reinsurance, and why does it matter to me?
Reinsurance is insurance for insurers. An insurance company transfers part of its risk to another company, and the arrangement is invisible to customers until the year it determines what everyone pays.
Why insurers need it. An insurer collects many small premiums and pays occasional claims. That works when losses are independent — one house burning down tells you nothing about the next. It breaks down for correlated losses, where one event causes thousands of claims simultaneously: a storm, a flood, an earthquake, a pandemic. A regional insurer could be wiped out by a single weather event.
Reinsurance spreads that concentration across the global market, so a storm in one country is absorbed by capital from everywhere.
The main forms:
Proportional — the reinsurer takes an agreed share of premiums and of claims.
Excess of loss — the reinsurer pays only above a threshold. The insurer keeps ordinary claims and passes on catastrophic ones. This is the dominant form for natural catastrophe cover.
Facultative — a single, individually negotiated risk, used for unusual or very large exposures.
Treaty — a standing agreement covering a whole class of business.
Retrocession — reinsurers reinsuring themselves, which is where the chain gets opaque.
Why it reaches your premium. Reinsurance operates in cycles. After a period of heavy catastrophe losses, reinsurers raise rates and tighten terms — a hard market. Primary insurers face higher costs and pass them on, so premiums rise for everyone, including people whose own claims history is spotless and who live nowhere near the affected region. When capital returns and losses subside, the market softens and prices fall.
This is a substantial part of the answer to "why did my premium go up when nothing changed?"
Climate change is reshaping it. Rising catastrophe losses have made some risks more expensive or harder to place, and where reinsurance becomes unavailable for a peril, primary cover tends to follow — which is why availability of flood and wildfire cover has become a policy question in several countries.
General information, not advice on any policy.