If you’re wondering how insurance companies can stay in business after major natural disasters, there’s a centuries-old strategy they have for mitigating losses called reinsurance. Reinsurance is, in simple terms, insurance that insurance companies buy for themselves to protect their assets against unforeseen or extraordinary losses.Â
It’s unknown when and where a wildfire, tornado, or hurricane will devastate homes, buildings, vehicles, livestock, and landscapes, so the primary or ceding insurance company (the one that issues you your home’s hazard insurance) pays for a premium with a reinsurance company (also known as an assuming insurer) to indemnify the primary insurer against part or all of the losses it may incur, as per the reinsurance agreement.
The purpose of reinsurance is multi-fold. Not only does it help primary insurance companies control their risks, it also helps them maintain their financial stability and grow their business.
How does that help you, the consumer? Primary insurers are able to provide more policies to homeowners as well as underwrite a wider range of policies to suit specific needs.
