Category: Reinsurance fundamentals · Reviewed by Mark Fox, Broker · Renewals · Last reviewed 2026-06-05
Reinsurance is the contract by which an insurance undertaking (the cedant) transfers, for consideration, all or part of a risk it has underwritten to another insurance undertaking (the reinsurer), so as to limit the cedant’s net exposure, stabilise its underwriting result and free regulatory capital for further underwriting.
Category: Reinsurance fundamentals Also known as: insurance of insurance, cession First codified in modern form: mid-nineteenth century, with the foundation of dedicated reinsurance companies such as Cologne Re (1846) and Swiss Re (1863) Related legislation: Solvency II Directive 2009/138/EC; PRA Insurance Rulebook
Reinsurance is a contract of indemnity between two insurance undertakings under which the reinsurer agrees, in consideration of a ceded premium, to indemnify the cedant in respect of all or part of the losses the cedant has, or may, incur under one or more contracts of insurance that it has issued. It is not, of itself, a contract of insurance between the reinsurer and the original insured: there is no contractual privity between the reinsurer and the policyholder, and the original insured cannot, save in narrowly defined circumstances such as a cut-through clause, claim directly against the reinsurer.
The economic purpose of reinsurance is fourfold: capacity (allowing the cedant to write larger lines than its capital would otherwise permit); stabilisation (smoothing the cedant’s underwriting result across years); catastrophe protection (capping the cedant’s exposure to a single peril event); and capital relief (reducing the cedant’s regulatory required capital under Solvency II) [1]. Reinsurance is fundamental to the global insurance system and underpins almost every line of insurance business written in the United Kingdom.
For Apex clients the existence of a robust reinsurance programme behind the insurer security on a policy is a material element of carrier selection.
The principal UK regulatory framework for reinsurance is Solvency II, implemented in the United Kingdom through the PRA Insurance Rulebook and currently undergoing reform under the Solvency UK programme. The Solvency II Directive (Directive 2009/138/EC) defines reinsurance and brings reinsurance undertakings within the same prudential regime as direct insurers [1]. The Reinsurance (Acts of Terrorism) Act 1993 provides for Pool Re terrorism reinsurance.
Reinsurance contracts are subject to the Insurance Act 2015 in respect of the duty of fair presentation owed by the cedant to the reinsurer. The Marine Insurance Act 1906 continues to apply to many reinsurance contracts, particularly those written on London market wordings. Choice of law and jurisdiction in international reinsurance are typically governed by express clauses, with English law and the courts of England and Wales (or London arbitration) the most common selection in the London market.
A reinsurance contract is a contract of indemnity: it responds to losses suffered by the cedant under the underlying insurance contracts, not to losses suffered directly by the original insured. The cedant must establish its liability under the original insurance before recovering from the reinsurer, although the standard ‘follow the settlements’ and ‘follow the fortunes’ clauses oblige the reinsurer to follow the cedant’s bona fide and businesslike settlements [2].
A reinsurance programme is constructed by the cedant (typically with the assistance of a reinsurance broker) by reference to the cedant’s risk appetite, capital position and reinsurance budget. The structure is usually a combination of proportional and non-proportional cessions, with facultative cover taken for individual risks that exceed treaty capacity or fall outside treaty exclusions.
Proportional reinsurance — quota share and surplus — cedes a fixed proportion of premium and losses to the reinsurer. Non-proportional reinsurance — excess of loss — responds only to losses above an agreed retention. Most cedants buy a mix to achieve the optimum trade-off between cost, capital relief and protection.
Placement is typically annual, on either a risk attaching or loss occurring basis. London market and continental European reinsurance is renewed principally on 1 January, 1 April, 1 June and 1 July depending on the territory and class. Market intelligence is exchanged at the Monte Carlo Rendez-Vous in September and the Baden-Baden meeting in October.
Reinsurance accounting is governed by IFRS 17 for cedants reporting under IFRS, with separate reinsurance contracts held on the balance sheet and presented in the income statement.
An illustrative example: a UK motor insurer with £500m of gross written premium and a £10m line on its largest fleet account purchases a 30 per cent quota share treaty (ceding 30 per cent of premium and losses across the portfolio), a property catastrophe excess of loss treaty (£50m excess of £20m, with three reinstatements) and facultative reinsurance on the £10m fleet to retain only £2m net. The combined programme reduces the insurer’s Solvency II SCR by approximately 25 per cent, stabilises its combined ratio and gives capacity to grow new business without raising fresh capital.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-05. Next review: 2026-12-05.
Apex Insurance Brokers Limited. Authorised and regulated by the Financial Conduct Authority, FRN 724952. Registered in England and Wales, Companies House 07014570. This entry provides general information about UK insurance concepts and is not regulated advice. Consult your insurance broker on your specific position.
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