Reinsurance in Life Insurance — How Risk is Shared
What reinsurance is and why life insurers use it, the meaning of retention and cession, how proportional and non-proportional arrangements share premiums and claims, the follow-the-fortunes principle, and where the policyholder stands.
Insurance for insurers
Reinsurance is insurance for insurers. A life insurer, called the cedant, passes part of the risk on its policies to a reinsurer and pays a share of the premium for it. When a claim arises on a reinsured policy, the reinsurer bears its agreed part.
The primary purpose is risk transfer. Reinsurance lets an insurer issue policies with sums assured larger than it could carry alone, smooths the effect of large claims on its results and supports its solvency.
Retention and cession
The amount an insurer keeps for its own account on any one life is its retention. The excess above the retention is ceded, that is passed to the reinsurer. A policy for less than the retention is kept in full.
Retention explains how a single large policy can be issued at all. The insurer accepts the whole sum assured from the customer, keeps what it is comfortable carrying and lays off the rest.
Proportional and non-proportional arrangements
In proportional arrangements, premiums and claims are shared in agreed proportions. Under a quota share, the reinsurer takes a fixed percentage of every policy covered. Under a surplus treaty, the insurer keeps its retention on each life and cedes the excess, so the reinsurer's share varies from policy to policy.
In non-proportional arrangements such as excess of loss, premiums and claims are not shared proportionately. The reinsurer pays only when losses pass an agreed level, and only the part above that level.
Under the follow-the-fortunes principle, the reinsurer shares in the outcome of the insurer's underwriting and claim decisions so long as they are made in good faith and within the policy terms. It accepts the insurer's good-faith claim settlements and does not second-guess each one.
Where the policyholder stands
Reinsurance is a business-to-business arrangement. The policyholder's contract is with the insurer alone; there is no contract or direct dealing between the reinsurer and the policyholder. The policyholder deals only with the insurer for servicing and claims, and the insurer owes the full claim under the policy whatever it has reinsured.
In India, GIC Re is the national reinsurer, and branches of foreign reinsurers also operate in the country.
Rules at a glance
A claim the customer never sees shared
Illustration: Nandini holds a term policy with a large sum assured. Her insurer has ceded most of that risk to a reinsurer under a surplus treaty. When she dies, her husband claims from the insurer, deals only with the insurer and is paid the full sum assured by the insurer.
Behind the scenes the insurer recovers the ceded part from the reinsurer. Nandini's family has no contract with the reinsurer and no need to approach it. Having investigated and paid the claim in good faith under the policy terms, the insurer can expect the reinsurer to follow that decision.
Sharing one risk three ways
- Assumptions, for arithmetic only: an insurer's retention on any one life is ₹2 crore. It issues a policy with a sum assured of ₹8 crore.
- Surplus treaty: ceded amount = ₹8 crore − ₹2 crore = ₹6 crore. The reinsurers' share is ₹6 crore ÷ ₹8 crore = 75%, and the insurer's is 25%.
- A death claim of ₹8 crore is paid in full by the insurer, which recovers 75% × ₹8 crore = ₹6 crore and bears ₹2 crore itself.
- A second policy of ₹1.5 crore is below the retention of ₹2 crore, so under the surplus treaty nothing is ceded.
- Quota share instead, with an assumed 40% ceded on every policy: on the ₹8 crore policy the reinsurer carries 40% × ₹8 crore = ₹3.2 crore and the insurer ₹4.8 crore.
- Excess of loss instead, with the reinsurer assumed to pay losses above ₹5 crore: on a loss of ₹8 crore the reinsurer pays ₹8 crore − ₹5 crore = ₹3 crore; on a loss of ₹4 crore it pays nothing.
Result. On the same ₹8 crore risk the reinsurer carries ₹6 crore under this surplus treaty, ₹3.2 crore under the assumed quota share and ₹3 crore under the assumed excess-of-loss cover. All treaty terms here are invented.
Key points
- Reinsurance transfers part of an insurer's risk to a reinsurer in return for a share of the premium.
- It allows larger sums assured, smooths large claims and supports solvency.
- Retention is what the insurer keeps on any one life; the excess is ceded.
- Quota share and surplus are proportional: premiums and claims are shared in agreed proportions.
- Excess of loss is non-proportional: the reinsurer pays only when losses pass an agreed level.
- The policyholder's contract is with the insurer alone.
Common misunderstandings
- Reinsurance does not give the policyholder a second company to claim from: the contract is with the insurer alone.
- The insurer does not pay only its retained share of a claim: it pays the policyholder in full and recovers the ceded part from the reinsurer.
- Quota share and surplus are not the same: a quota share cedes a fixed percentage of every policy, while a surplus treaty cedes only the excess over the retention.
- Excess of loss is not a proportional arrangement: the reinsurer pays only when losses pass the agreed level.
- Follow the fortunes does not bind the reinsurer to any decision whatever: it covers decisions made in good faith and within the policy terms.
Questions people ask
Who is the cedant?
The insurer that passes part of its risk to a reinsurer.
Can a policyholder approach the reinsurer if a claim is delayed?
No. There is no contract or direct dealing between the reinsurer and the policyholder; the claim lies against the insurer.
How does reinsurance support solvency?
By moving part of the risk off the insurer's own account, so that large or unexpected claims fall less heavily on its capital.
What this lesson relies on
- General principles of reinsurance: retention, cession, proportional and non-proportional treaties, follow the fortunes (no statute or circular figures are quoted in this lesson)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.