You have heard the term Ceded while exploring all about auto insurance. You may be wondering what ceded means in auto insurance. If that’s the case then you have hit just the right spot. Today, I am planning to explain this term in detail. So, let’s get started.

What Does Ceded Mean in Auto Insurance?

Ceded is a term that usually refers to the Ceding process employed typically in auto reinsurance.

Let’s say you get your car insurance from company A, your primary insurance company. Now company A wants to balance the financial risk of insurance, and thereby, it goes to another insurance company for reinsurance. Let’s say it’s company B. Now company A will get the premium and share a portion of the premium alongside risk with company B, a reinsurance company.

A cedent is a party (primary insurance company) that passes a portion or all risk related to an insurance policy to another insurer or reinsurance company.

Why Auto Insurance Company Opts for the Ceding Process?

The concept of ceded is simple, it’s when one insurance company share a portion or complete risk of an insurance policy with another company. Now the question is why primary insurance companies opt for this practice. Here are some common reasons:

Better Risk Management

The main purpose of sharing this risk is to ensure that the company can handle financial claims effectively. Multiple or large insurance claims are a financial burden for an insurance company, which can share this burden with another company or a reinsurer. When it comes to risk management, the ceding process seems like the best choice a company can make.

Boost Capital Efficiency

When primary insurers involve reinsurers in a policy then they can make the most of their capital. Regulatory bodies require insurance companies to keep a certain amount of capital as reserves to handle auto insurance claims. Now if they share the risk, they can free up their capital reserve to underwrite some new policies. It’s how they can get new clients and boost capital efficiency.

Stable Earning

Many auto insurance companies cede the risk of insurance policy with reinsurers because it’s how a company can achieve earning stability. They share the risk and know that in case of any claim another company is there to meet the financial obligations. As a result, primary insurance companies can handle losses over time and improve their financial results.

Solvency Protection

Another reason many insurance companies cede the risk of a policy is to obtain solvency protections. In case of any catastrophic event where it needs to meet huge claims, risks of solvency increase. An insurance company shares the risk with a reinsurer so that it can meet its financial obligation and prevent bankruptcy.

Wrap up

I’m sure now you have a clear idea of what ceded means in auto insurance. The ceding process has become a common practice in the insurance industry because it allows primary insurance companies to spread the risk and expand their wings across the market. The best thing is that they can achieve predictable financial results while enjoying capital efficiency through this process. If you’re looking for reliable ceding solutions, consider partnering with Matrix Insurance for expert guidance and support.