What is the role of the primary insurer in a reinsurance arrangement?

The role of the primary insurer in a reinsurance arrangement is to cede some risk to another insurer, known as the reinsurer. This process allows the primary insurer to transfer a portion of its liabilities, which helps to stabilize its financial position and reduce the risk of significant losses from large or catastrophic claims. By cedging some of the risk, the primary insurer can also free up capital to underwrite new policies, ensuring that it maintains sufficient liquidity and solvency.

In a reinsurance arrangement, the primary insurer retains some level of risk while sharing a portion with the reinsurer, which can offer financial support during times of unpredictable losses. This relationship is beneficial for both parties, as it allows the primary insurer to mitigate exposure to large claims while providing the reinsurer a chance to earn premiums for underwriting that risk. This dynamic is a fundamental aspect of risk management in the insurance industry.