Reinsurance allows an insurance company to pass on some of its risk to another insurance company. The insurance company pays a premium to the reinsurer, and in exchange, the reinsurer will reimburse the insurance company for a proportion of the future claims incurred on the policy.

But let's have a think about how the accounting for this might work, and we'll start off with an example where a customer has paid 100 of premiums to an insurance company, and the insurance company has passed on 20 of premiums to the reinsurance company, and that's in exchange for receiving 20% of future claims back from the reinsurer.

Now, in this example, at the start of the policy, the 100 of premiums received by the insurance company are all unearned.

So the insurance company recognizes a reserve, an unearned premium reserve of 100.

However, the insurance company also knows that that 20 of premium paid to the reinsurance company is effectively a prepayment.

Therefore, the insurance company also recognizes an asset of 20, and that asset is labeled as the reinsurer's share of reserves, reflecting the fact that the accounting here is mirroring the accounting on the underlying policy. Now, it's important to note that the accounting does not allow that reinsurance asset to be offset against those reserves, and therefore, it's always shown separately on the face of the balance sheet.

Now, let's roll forward until the end of the policy, by which stage all of that unearned premium has now been earned, but also the insurance company has received some claims from the customer.

And in this example, we're going to assume the claims are 80, and they're all unpaid. So the insurance company now has claims reserves showing of 80.

However, the insurance company also knows that because of the reinsurance policy, it can claim back 20% of those claims from the reinsurer.

And therefore, again, the insurance company is going to recognize an asset on the balance sheet, and this time it reflects the reinsurer's share of the claims, and that's 16. And again, that asset cannot be offset against the underlying reserves.

So again, it's showing separately on the face of the balance sheet.

So you can see how the reinsurance accounting always mirrors the accounting on the underlying policy, but is also always shown separately as an asset on the balance sheet.