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Reinsurance

Trading Term

Reinsurance is insurance purchased by insurance companies, in which a primary insurer pays a premium to transfer some portion of its loss exposure to a reinsurer. This reduces the primary insurer’s capital volatility and its risk of insolvency after a large event, but it is priced above the expected loss because the premium must also fund the reinsurer’s capital charges, catastrophe modeling, brokerage, staff and profit margin. Reinsurance pricing is capital-intensive and therefore sensitive to interest rates, since reinsurers must offer returns competitive with low-risk alternatives in order to attract and retain capital.

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