Understanding Reinsurance

What is Reinsurance?

Reinsurance sits at the center of the global insurance system. When insurers take on more exposure than they want to hold, they transfer a portion of that risk to a reinsurer in exchange for part of the premium. This strengthens their balance sheets, stabilizes financial results, and gives them the capacity to support the coverage individuals and businesses depend on.

In these arrangements, the insurer (the cedent) passes a defined share of its portfolio to a reinsurer. The reinsurer earns the corresponding premium and takes responsibility for that part of the risk, allowing the cedent to write larger policies and absorb more variability than it could on its own.

How Reinsurance Works

Reinsurance operates through agreements that clearly define how risk and premium are shared. The reinsurer is paid to stand behind the insurer when losses occur, whether they’re routine or tied to large, unexpected events.

Most programs fall into two categories. In proportional structures, the reinsurer takes a fixed percentage of each policy along with the matching premium and loss share. In excess-of-loss structures, the reinsurer steps in once claims pass a predetermined level, protecting the insurer from severe outcomes. These mechanisms give insurers precise tools for controlling risk exposure and managing capital.

Why Reinsurance Matters

Reinsurance is one of the most important pillars of financial stability. It supports insurer solvency during challenging periods, expands the types of coverage insurers can offer, and provides balance-sheet protection against volatility and catastrophic events.

Its return profile is equally important. Reinsurance generates steady, premium-based income tied to real insurance activity rather than market cycles or speculation. This history of consistent performance is why it has long been considered one of the most reliable sources of real-world yield.

Modernizing Reinsurance with Tokenization

The fundamentals of reinsurance remain strong, but the way capital enters the market is changing. For most of its history, access was limited to specialized reinsurers and a narrow group of institutional investors. Tokenization and onchain infrastructure now open the door to broader participation through models inspired by traditional Insurance-Linked Securities (ILS) as well as new onchain structures.

Moving reinsurance onchain introduces meaningful advantages. Blockchain provides real-time visibility into collateral, exposure, and performance. Smart contracts reduce operational friction by automating processes that have long relied on manual workflows. Tokenized positions create forms of liquidity and accessibility that simply don’t exist in the traditional market.

By bringing reinsurance risk onchain, the market gains deeper capital participation, greater underwriting capacity, and a more efficient value chain. Insurers benefit from expanded support, and investors gain access to a proven source of uncorrelated, real-world yield.