Reinsurance Reinsurance is a means by which an insurance company can protect itself with other insurance companies against the risk of losses. Individuals and corporations obtain insurance policies to provide protection for various risks (hurricanes, earthquakes, lawsuits, collisions, sickness and death, etc.). Reinsurers, in turn, provide insurance to insurance companies. {text:bookmark-start} {text:bookmark-end} Functions of reinsurance There are many reasons why an insurance company would choose to reinsure as part of its responsibility to manage a portfolio of risks for the benefit of its policyholders and investors. {text:bookmark-start} {text:bookmark-end} Risk transfer The main use of any insurer that might practice reinsurance is to allow the company to assume greater individual risks than its size would otherwise allow, and to protect a company against losses. Reinsurance allows an insurance company to offer higher limits of protection to a policyholder than its own assets would allow. For example, if the principal insurance company can write only $10 million in limits on any given policy, it can reinsure (or cede) the amount of the limits in excess of $10 million. Reinsurance’s highly refined uses in recent years include applications where reinsurance was used as part of a carefully planned hedge strategy. {text:bookmark-start} {text:bookmark-end} Income smoothing Reinsurance can help to make an insurance company’s results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage. {text:bookmark-start} {text:bookmark-end} Surplus relief An insurance company's writings are limited by its balance sheet (this test is known as the solvency margin). Whe ...