Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the case of a financial (personal) loss.
Whereas, Reinsurance is insurance that is purchased by an insurance company (the “ceding company” or “cedant” or “cedent” under the arrangement) from one or more other insurance companies (the “reinsurer”) directly or through a broker as a means of risk management. The ceding company and the reinsurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay a share of the claims incurred by the ceding company. The reinsurer is paid a “reinsurance premium” by the ceding company, which issues insurance policies to its own policyholders.