Background
Reinsurance is an insurance transaction between insurance companies in which an insurance company transfers all or part of a risk by entering into a contract with another insurance company. When it does this, it creates a reinsurance transaction. The company that reduces its risk, typically by paying a fee, is called the ceding company, and the company that takes on the risk is called the assuming company.
The origin of reinsurance is in transactions that relieve the ceding company of risks that would exceed its risk tolerance, thus transferring a portion of its risk to larger companies, or to groups of companies.
This type of transaction allows insurance companies to offer customer larger amounts of coverage than would otherwise be feasible.
Historical Perspective
Since its beginning as a basic risk sharing process, reinsurance has evolved to include transactions that involve every aspect of the financial operation of an insurance company. Among these are transactions that allow insurance companies to share in the financial results of the coverage that they write.
The origins of reinsurance go back to the fourteenth century in the reinsurance of ocean marine risks. Initially, the purpose of reinsurance was exclusively to spread risk among insuring entities, or to protect the insured against the insolvency of the insurer. During the 18th century, problems arose in England from policies that were reinsured for fronting companies in Europe. These problems resulted in reinsurance essentially being banned in England for over 100 years. This encouraged the development of private underwriters at Lloyds.
In other countries, the increasing demand for reinsurance gave rise to the development of specialized reinsurance companies, including life reinsurance companies, starting in the 18th century. Up until this time reinsurance agreements were always written on an individual risk basis. It was not until early in the 19th century that the modern concept of a reinsurance treaty developed, and in 1842, the first professional reinsurance company, Cologne Re, was established, followed by Munich Re in 1880. It was during this period the first reinsurance subsidiaries were established by insurers, greatlyincreasing the availability of reinsurance. At this stage, virtually all of the reinsurance companies were based in Europe. There were no significant independent reinsurance companies in the United States until after 1900.
