What is reinsurance?

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Affordableone Insurance LLC, Insurance Agency

@AffordableoneInsuranceLLC • 06/30/16 This answer was first published on 06/30/16. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.

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Some people don't like this example but I do. Think of what a bookie does. They take bets in the hope that they know more than the people betting. Sometimes they will accept too many bets to one side. They recognize that there is a very high risk that if things go wrong it could cost them a lot of money.

Insurance companies have a similiar problem. Sometimes they will look at a risk and determine that they have bet on the wrong side and if the event happens the cost to them would be more than they are ready to accept so they reinsure with another company. By doing so they reduce their risk but they also cost themselves money as they must pay the reinsurance company a fee. Is it worth it? On very large risks, yes.

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