Reinsurance in health insurance is essentially insurance for insurance companies. When a health insurer faces the risk of unexpectedly high medical claims, it can transfer some of that financial exposure to another company, called a reinsurer. This arrangement protects the original insurer from catastrophic losses and, in many cases, helps keep premiums lower for consumers. The global life and health reinsurance market was valued at $180.4 billion in 2025 and is projected to reach nearly $236 billion by 2030.
How Reinsurance Works
A reinsurance arrangement is a contract between two parties: the original health insurer (called the “cedent”) and the reinsurer. The cedent pays the reinsurer a premium, and in return, the reinsurer agrees to cover some portion of the cedent’s claims when they exceed a certain level. The reinsurer’s obligation only kicks in after the original insurer’s liability under its own policies has been incurred, so it functions as a financial backstop rather than a replacement for the primary coverage.
Think of it this way: your health insurer collects premiums from thousands of members and pays their medical claims. Most years, the math works out. But if a handful of members develop conditions requiring millions of dollars in treatment, or if a pandemic drives claims far above projections, the insurer could face serious financial trouble. Reinsurance absorbs that spike.
The Attachment Point: When Reinsurance Kicks In
Reinsurance doesn’t cover every dollar of claims. It activates at a specific threshold called the “attachment point,” which is the dollar amount of claims costs for an individual enrollee above which the reinsurer starts reimbursing the insurer. Below that threshold, the original insurer pays everything on its own.
Once claims exceed the attachment point, the reinsurer reimburses at a set coinsurance rate, covering a percentage of costs up to a cap. So if an attachment point is set at $100,000, and a member’s annual claims reach $400,000, the reinsurer would cover its agreed share of the $300,000 above the threshold. This structure means reinsurance targets the most expensive, least predictable cases rather than routine medical care.
Proportional vs. Non-Proportional Reinsurance
Health reinsurance comes in two broad structures. In proportional reinsurance, the reinsurer takes on a fixed percentage of every policy the insurer writes. If the agreement is for 30%, the reinsurer collects 30% of the premiums and pays 30% of the claims. This is straightforward risk-sharing from dollar one.
Non-proportional reinsurance, often called “excess of loss” reinsurance, works differently. Here, the reinsurer only pays when claims exceed a specified amount. The insurer handles everything below that line. This is the more common structure in health insurance because it specifically targets the unpredictable, high-cost claims that pose the greatest financial threat. Most state reinsurance programs and individual market arrangements use this excess-of-loss approach.
Why It Matters for Your Premiums
Reinsurance has a direct effect on what you pay for health insurance. When insurers know they have protection against their most expensive claims, they don’t need to build as large a financial cushion into their premium rates. The savings get passed through to consumers in the form of lower monthly costs.
The evidence from state-level reinsurance programs is striking. After Alaska and Minnesota implemented reinsurance programs, marketplace premiums dropped by 26% to 37% in Alaska and 22% to 34% in Minnesota across different plan levels. These aren’t small adjustments. For someone paying $600 a month for coverage, a 30% reduction means saving over $2,000 a year.
Reinsurance also encourages insurers to enter or stay in markets they might otherwise avoid. If a state’s individual market has a small population with a few very sick members, an insurer without reinsurance protection might exit that market entirely, leaving consumers with fewer choices. Reinsurance reduces that risk, which helps maintain competition.
State Reinsurance Programs Under the ACA
Section 1332 of the Affordable Care Act allows states to apply for “innovation waivers” to design their own approaches to making coverage more affordable. Many states have used this provision to create reinsurance programs for their individual insurance markets. As of 2025, at least 19 states have active Section 1332 waivers, most of which involve reinsurance. These include Alaska, Colorado, Delaware, Georgia, Hawaii, Idaho, Maine, Maryland, Minnesota, Montana, New Jersey, New York, North Dakota, Oregon, Pennsylvania, Rhode Island, Virginia, Washington, and Wisconsin.
These programs typically work by reimbursing insurers for a portion of claims that exceed a set attachment point. The funding comes from a combination of state dollars and federal “pass-through” funds. The federal contribution represents money the government saves because lower premiums mean lower subsidy payments on the marketplace. That savings gets redirected back to the state to fund the reinsurance program, creating a self-reinforcing cycle that benefits consumers.
Stop-Loss Insurance for Employer Plans
If you get health coverage through a large employer, there’s a related concept worth understanding. Many big companies “self-fund” their health plans, meaning they pay employee medical claims directly rather than buying a policy from an insurer. These employers face the same problem insurers do: a few extremely expensive cases can blow up their budget.
The solution is stop-loss insurance, which functions like reinsurance but is designed specifically for self-funded employers. It comes in two forms. Specific stop-loss protects against any single person’s claims exceeding a set dollar amount. Aggregate stop-loss protects against total plan claims being higher than expected across all employees. Both work on the same principle as reinsurance: the employer handles predictable costs, and the stop-loss carrier absorbs the financial shock of outlier claims.
One important limitation: these contracts are typically written on an annual basis. If a member starts an expensive multi-year treatment, the stop-loss carrier may only be responsible for costs incurred during the current contract year unless the policy is specifically structured to cover ongoing payments.
How Reinsurance Keeps Insurers Solvent
Health insurers are required to maintain minimum levels of financial reserves to ensure they can pay claims even in a bad year. Regulators assess these requirements using risk-based capital standards, essentially stress tests for an insurer’s balance sheet. Reinsurance plays a direct role here because regulators allow insurers to calculate their required capital “net of reinsurance,” meaning the protection from a reinsurance contract reduces the amount of cash an insurer needs to hold in reserve.
This frees up capital that the insurer can use to expand into new markets, invest in care management programs, or simply operate more efficiently. For smaller regional health plans that may not have the deep reserves of a national carrier, reinsurance can be the difference between being able to offer coverage in their market or not. It’s one of the less visible but most important mechanisms keeping the health insurance system functional, especially in markets with small enrollment pools where a handful of high-cost members can represent an outsized financial risk.