Reinsurance can be defined as insurance for direct insurers. It allows primary insurers to share risk with other entities and as a result protect direct insurers against the adverse selection. Direct insurers for FMRE Life and Health refers to individual and group life insurers, funeral services providers, health insurers also known as medical aid schemes, and occupational health schemes.
A direct insurer can need reinsurance for the same reason that an individual needs insurance coverage. This is to guard against unforeseeable losses that would be very large relative to the available resources.
Reinsurance commonly applies to all insured claims or it can cover only a designated sphere of expense or claim. For example in health insurance, reinsurance can purchase for in-patient hospital expenses or alternatively, reinsurance can cover only specified catastrophic diseases, depending on the requirements of the direct insurer.

Reinsurance and losses/claims

Insurers typically worry about two types of very large claims-aggregate losses for a group or book of policies being above some overall level, and loss per insured person exceeding some threshold.
Aggregate losses could exceed expectations if more group members had expenses above the average than was expected for the group. In life insurance, it will relate to more deaths in a scheme or book than was expected. This could be as a result of a bus accident or collapse of a building resulting in a catastrophe.
 To place a limit on their exposure to such high claims, insurers often purchase reinsurance. In such cases it is known as aggregate stop loss reinsurance, since it puts a stop to overall losses above some level.
Annual losses per insured person could become excessive. The excessively high claim could fall between 1-5 percent of the company’s total health care expenditure budget.  Many direct insurers including companies with self-insured health plans, purchase excess of loss reinsurance in order to avoid bearing full risk for any individual’s expenses/claims that exceed some pre determined level.
 In life insurance when it comes to any one individual it is known as surplus reinsurance where any amount over a certain limit which will be the company’s retention limit is covered by a reinsurer.