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Simple English definitions for legal terms
reinsurance
Read a random definition: doombook
A quick definition of reinsurance:
Reinsurance: When one insurance company wants to protect itself from a big risk, it can ask another insurance company to help. The second company agrees to take on some of the risk in exchange for some of the money the first company collected from the customer. This is called reinsurance or reassurance.
A more thorough explanation:
Definition: Reinsurance is a type of insurance where one insurance company transfers some or all of its risks to another insurance company in exchange for a portion of the premium. This helps the first insurance company to reduce its exposure to risk and protect itself from large losses.
Example: Let's say an insurance company has insured a large commercial building for $10 million. To reduce its risk, the insurance company can buy reinsurance from another insurance company. The second insurance company agrees to pay a portion of the claim if the building is damaged or destroyed, in exchange for a percentage of the original premium.
Another example: An insurance company that specializes in insuring ships may buy reinsurance from another insurance company to protect itself from large losses if a ship sinks or is damaged in a storm.
These examples illustrate how reinsurance works. By transferring some of its risks to another insurance company, the first insurance company can reduce its exposure to losses and protect itself from financial ruin.