reinsurance
Insurance purchased by insurance companies to manage risk by transferring portions of their insurance portfolio to other insurers, reducing the financial impact of large claims.
Example
“After Hurricane Katrina's massive losses, reinsurance companies faced billions in claims from primary insurers who had transferred their risk.”
Memory Tip
REINSURANCE = insurance for insurance companies. They buy coverage to protect against giant claims.
Why It Matters
Reinsurance affects the stability and reliability of insurance companies that protect your home, car, and health. When insurers have strong reinsurance coverage, they are less likely to become insolvent after major disasters, which means your claims are more likely to be paid when you need them most.
Common Misconception
Many people think reinsurance is the same as their personal insurance policy, but it is actually insurance for insurance companies themselves. Reinsurance does not directly affect your coverage or premiums in an obvious way, though it helps keep insurers financially stable and solvent.
In Practice
After a major hurricane causes 50 billion dollars in insured damages, a primary insurance company that wrote 5 billion dollars in policies might use reinsurance to cover 3 billion dollars of those claims through agreements with reinsurers. This allows the primary insurer to pay claims to customers without becoming bankrupt, while spreading the financial burden across multiple reinsurers worldwide.
Etymology
RE- (again) + INSURANCE. Insurance companies buying INSURANCE for themselves.
Common Misspellings
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