☰Reinsurance is insurance for insurance companies: a reinsurer agrees to cover losses above an agreed level in exchange for a share of the premium. For a captive, it is how you take meaningful risk without betting the company. In the most common arrangement, the captive retains losses up to a level it can comfortably absorb and buys reinsurance above it, so a severe year is capped at a known number. Quota-share arrangements, where the captive and a reinsurer split risk proportionally, are common as programs build history.
Ownership also changes the buying position. A captive accesses reinsurance markets directly, which works something like buying at wholesale: the markup a commercial insurer would add on the way through is gone, and pricing reflects your own program rather than a portfolio average. The structure evolves over time. Many captives start with modest retentions and heavier reinsurance, then keep more risk as surplus builds, reducing what they pay away. Reviewing that balance regularly is one of the simplest levers for improving a captive's returns.