cedant and reinsurer

When an insurer decides it does not want to carry all of a risk alone, two parties enter the picture, much like a contractor who wins a big job and then hires a subcontractor to handle part of it. The insurer who originally sold the policy and now passes part of the risk along is the cedant. The company that agrees to take on that passed-along share is the reinsurer. The policyholder usually never even knows the reinsurer exists — they keep dealing only with the company they bought from.

Precisely, the cedant (also called the ceding company, primary insurer, or direct insurer) is the party that 'cedes', meaning gives up, a portion of its risk and pays a reinsurance premium for the favor. The reinsurer (the assuming company) is the party that 'assumes' that portion and promises to reimburse the cedant for the agreed share of claims. The crucial legal point is that this is a contract between the two insurers only. The cedant remains fully and solely responsible to its policyholder: if a claim is owed, the cedant must pay the customer in full, and then separately collects the reinsurer's share. The customer has no direct claim against the reinsurer.

This separation matters enormously in practice. Because the cedant stays on the hook to its policyholders even if the reinsurer fails to pay, the financial strength of the reinsurer becomes its own risk — called counterparty or credit risk. A cedant that reinsures with a shaky reinsurer has merely swapped insurance risk for the risk that its reinsurer goes broke at the worst possible moment, precisely when a catastrophe triggers many recoveries at once. Actuaries therefore care not only about how much is ceded but to whom, and large programs are spread across many highly rated reinsurers so no single failure can hurt too much.