What reinsurance is
Insurance companies don't want to hold all of their risk. If they did, a single bad year could bankrupt them. At the very least, year-to-year outcomes would be exposed to too much volatility. So insurers buy reinsurance: insurance for insurers.
When an insurer writes a book of policies, it will often pass a portion of the premiums to a reinsurer in exchange for the reinsurer assuming a share of the risk. If losses come in lower than expected, the reinsurer keeps what's left of those premiums as margin. If losses are higher, the reinsurer helps cover the difference.
Strictly speaking, the insurance market, one of the world's largest and most essential markets (everything runs on insurance), couldn't function without reinsurance.
Some reinsurance terms you'll see around the docs¹:
Premium: the payment an insurer makes to a reinsurer in exchange for the reinsurer assuming its risk. Premiums are the source of the yield earned by Re depositors.
Claims: the payments a reinsurer makes when covered losses occur. Premiums flow in, claims flow out, and the gap between the two drives underwriting profit or loss.
Combined Ratio: the core profitability metric for insurers and reinsurers, equal to the sum of operating costs and claims paid divided by premiums earned). Below 100% means underwriting profit; above 100% means underwriting loss. A reinsurer can still be profitable above 100% if investment income covers the gap.
Ceding / Cedent: when an insurer transfers risk to a reinsurer, it "cedes" that risk. The insurer is the cedent. This is the core transaction reinsurance is built around.
Tail Risk: the risk of severe, low-probability losses.
Lines of Business: the categories of risk a reinsurer writes: property, casualty, life, specialty, etc. Relevant for understanding portfolio diversification and concentration risk.
Collateral: Assets a reinsurer sets aside to guarantee it can pay claims. Unauthorized reinsurers (i.e., those not licensed in the cedent's home jurisdiction) post collateral directly against each contract, so the insurer can rely on it. Authorized reinsurers instead hold regulatory capital as surplus on their own balance sheet.
114 Trust: A segregated US trust account, meeting New York Regulation 114 standards, through which an unauthorized reinsurer posts collateral. The assets are held exclusively for the cedent, who can draw on them to pay covered claims. The reinsurer cannot touch the funds until all obligations under the contract are met, at which point any remaining assets are released back to it.
¹ The terms explained here are provided as a general glossary to help readers understand reinsurance and related concepts. They are simplified for clarity, are not legal or financial advice, and do not form part of any contract. Where a defined term appears in an actual agreement, treaty, or other binding document, the definition set out in that document controls and prevails over anything stated here. For educational and informational purposes only. Nothing on this Site is investment, financial, legal, or tax advice, or an offer, solicitation, or recommendation to buy, sell, or hold any digital asset, including reUSD and reUSDe. Yields are not guaranteed and all figures are illustrative, not a promise of return; past performance is not a reliable indicator of future results. Digital assets involve significant risk, including total loss of principal — the Tokens are not bank deposits and are not insured by any government agency. The Tokens are available only to eligible non-U.S. persons in permitted jurisdictions and are subject to KYC/AML requirements. The binding terms of the applicable agreements govern and prevail over this summary. See our full Disclosures for important additional information.
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