# Reinsurance Ceded: Definition, Types, Vs. Reinsurance Assumed

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> **Definition**
>
> Reinsurance ceded is the portion of risk that a primary insurer transfers to another insurer in order for the primary insurer to reduce its overall risk exposure.

## 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](https://www.investopedia.com/terms/r/risk.asp) 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](https://www.investopedia.com/terms/r/reinsurance-sidecar.asp). 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.

### Key Takeaways

*   Reinsurance ceded is a process used by insurance companies to share portions of their coverage with other insurance companies in order to reduce the overall risk in their portfolios.
*   The primary insurer essentially sub-contracts portions of responsibility for the coverage.
*   The primary insurer remains the point of contact for the client.
*   This process reduces the hazards of catastrophic claims, spreading the responsibility among two or more insurers.
*   Reinsurance is a sub-industry of insurance, with many companies specializing in particular types of coverage.

## Understanding Reinsurance Ceded

The 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](https://www.investopedia.com/terms/i/insurance_claim.asp).

The accepting company pays a commission to the ceding company on the reinsurance ceded. This is called a [ceding commission](https://www.investopedia.com/terms/c/ceding-commission.asp), and covers administrative costs, underwriting, and other related expenses. The ceding company can recover part of any claim from the accepting company.

### Biggest Names in Reinsurance

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.

Some 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](https://www.investopedia.com/terms/l/liability_insurance.asp) for a large international business, a specialty reinsurer may be necessary because [diversification](https://www.investopedia.com/terms/d/diversification.asp) is not possible.

> **Important**
>
> 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 Contracts

There are two types of reinsurance contracts used for reinsurance ceding: facultative reinsurance and the treaty reinsurance contract.

### Facultative Reinsurance

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,

### Treaty Reinsurance

With a [treaty reinsurance](https://www.investopedia.com/terms/t/treaty-reinsurance.asp) 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.

> **Fast Fact**
>
> 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.

## Benefits of Reinsurance Ceded

The 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.

Reinsurance also allows an insurer the freedom to [underwrite](https://www.investopedia.com/terms/u/underwriting.asp) 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,

## Challenges to Reinsurance Ceded

Reinsurance 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.

The 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.  

## Regulation of Reinsurance Ceded

The 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.  

## Questions & Answers

## What Is the Difference Between Reinsurance Ceded and Reinsurance Assumed?

Reinsurance ceded and reinsurance assumed are the actions taken by the two parties involved in this type of contract between two insurance companies.

*   Reinsurance ceded is the action taken by an insurer to pass off a portion of its obligation for coverage to another insurance company.
*   Reinsurance assumed is the acceptance of that obligation by another insurance company.

## What Is a Ceded Loss Ratio?

The loss ratio is a key metric for the insurance industry. It is the ratio of losses paid out to premiums paid in and is expressed as a percentage. It is a high-level snapshot of an insurance company's profitability.

Ceded loss ratio, also called [ceded reinsurance leverage](https://www.investopedia.com/terms/c/ceded-reinsurance-leverage.asp), is an indication of how much of its risk (and how much of its premiums) an insurance company is passing off to reinsurers.

## What Is the Difference Between Surplus Share Reinsurance and Quota Reinsurance?

Surplus share reinsurance and quota reinsurance are two types of agreement between an insurer and a reinsurer that define the responsibilities of each party.  

In a [surplus share treaty](https://www.investopedia.com/terms/s/surplus-share-treaty.asp#:~:text=A%20surplus%20share%20treaty%20is%20a%20reinsurance%20agreement%20whereby%20the,and%20premiums%20with%20the%20reinsurer.), the primary insurer retains the liabilities of a contract up to a specific amount. The remainder is passed along to a reinsurer.  

A [quota share treaty](https://www.investopedia.com/terms/q/quota-share-treaty.asp#:~:text=A%20quota%20share%20treaty%20is,to%20a%20predetermined%20maximum%20coverage.) is essentially the reverse. The primary insurer passes along the responsibility for risks to a reinsurer, up to a certain limit. The primary insurer is responsible for losses exceeding that amount.

> **Article Sources**
>
> 1.  Reinsurance News. "[Top 50 Global Reinsurance Groups](https://www.reinsurancene.ws/top-50-reinsurance-groups/)."
>     
> 2.  Statista. "[Reinsurance](https://www.statista.com/topics/1581/reinsurance/)."
>     
> 3.  Deloitte. "[Modernizing Reinsurance Administration](https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-modernizing-reinsurance-insurance.pdf)."
>     
> 4.  Life & General Insurance. "[Top 12 Advantages of Reinsurance](https://www.lnginsurance.com/blog/advantages-of-reinsurance/)."
>     
> 5.  Deloitte. "[Modernizing Reinsurance Administration](https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-modernizing-reinsurance-insurance.pdf)."
>     
> 6.  Captive. "[Reinsurance Business Faces Challenges but Is Positioned to Address Them](https://www.captive.com/news/reinsurance-sector-faces-challenges-but-is-positioned-to-address-them)."
>     
> 7.  International Risk Management Institute. "[Reinsurance and Ever-Expanding Regulation and Oversight](https://www.irmi.com/articles/expert-commentary/reinsurance-and-ever-expanding-regulation-and-oversight)."
>     
> 8.  Corporate Finance Institute. "[What is the Loss Ratio?](https://corporatefinanceinstitute.com/resources/knowledge/other/loss-ratio/)"