An insurer that has written a risk does not have to keep all of it. The ceding company is the primary insurer that transfers a portion of its risk to a reinsurer in exchange for a share of the premium. The original policyholder continues to deal only with the ceding company.

Cession may be proportional, with premium and losses shared by fixed percentages, or non-proportional, with the reinsurer responding only when losses exceed a retention. The ceding company remains responsible for claims handling and for the full amount due to the policyholder even if the reinsurer fails to pay.

Financial strength of the reinsurer, wording of the treaty, and collateral arrangements all affect the credit the ceding company receives for the reinsurance on its own balance sheet. Effective use of reinsurance allows a ceding company to write larger limits and stabilize results.

• Insurer that transfers risk to a reinsurer
• Remains liable to the original policyholder
• Pays a share of premium for the protection
• Uses reinsurance to manage capacity and volatility