What does "ceding" refer to in the context of reinsurance?

Ceding refers to the process of transferring a portion of risk from one insurance company to another, a fundamental concept in reinsurance. When an insurer cedes risk, they are seeking to reduce their exposure to potential losses by sharing that risk with a reinsurer. This transfer allows the ceding company to manage its overall liability more effectively and to maintain financial stability, especially in cases where it faces significant risk concentrations.

Understanding ceding is critical in the insurance landscape, as it helps insurers protect themselves from catastrophic losses and enables them to underwrite more business than they could confidently manage alone. By using reinsurance, companies can smooth their financial performance and better handle unpredictable events that might otherwise strain their resources.