In a reinsurance agreement, what does the reinsurer do?

In a reinsurance agreement, the reinsurer is responsible for insuring the liabilities of the ceding company in exchange for a premium. This arrangement allows the ceding company, which is the primary insurer, to share the risk associated with its insurance portfolio. By transferring a portion of its risk to the reinsurer, the ceding company can stabilize its financial position, enhance its capacity to underwrite new business, and protect itself from potentially large losses.

The premium paid to the reinsurer reflects the risk assumed, allowing the reinsurer to provide coverage that supports the ceding company’s overall business strategy. This cooperation between the ceding company and the reinsurer is crucial for the functioning of the insurance market, as it helps maintain the balance between risk and capital in the industry.

Other options do not accurately describe the role of the reinsurer. For instance, the reinsurer does not transfer liabilities back to the ceding company or act as the primary insurer; instead, it operates as a secondary layer of insurance. Additionally, the reinsurer is generally not responsible for underwriting every loss individually; instead, it often operates on a portfolio basis, providing coverage for a range of risks rather than evaluating each claim separately.