What is reinsurance

Reinsurance is insurance for insurance companies. Insurance is all about spreading risk, diversification. Insurance companies buy insurance to cover themselves against huge losses. This is particularly applicable for P&C or property and casualty insurance companies that have potential exposure to large storms.

Besides risk transfer another reason why insurance companies use reinsurance is income smoothing. That is they can create more predictable income streams as reinsurance will reduce large losses.

Basically insurance companies must choose reinsurance companies carefully as they transfer insurance risk for credit risk

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