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The 1994 Notice is virtually identical to the 1993 Notice,
and it states the same reason for respondent’s adjustments to the
years referenced therein. Neither the 1993 Notice nor the 1994
Notice disregarded the income that petitioner earned under the
reinsurance agreements.
2. Reinsurance in General
a. Overview
Reinsurance is an agreement between an initial insurer (the
ceding company) and a second insurer (the reinsurer), under which
the ceding company passes to the reinsurer some or all of the
risks that the ceding company assumes through the direct
underwriting of insurance policies. Generally, the ceding
company and the reinsurer share profits from the reinsured
policies, and the reinsurer agrees to reimburse the ceding
company for some of the claims that the ceding company pays on
those policies. A reinsurer may pass on (retrocede) its position
on reinsurance to a third insurer. This type of agreement is
called a retrocession agreement, and the third insurer is called
a retrocessionaire.
Virtually all life insurance companies purchase reinsurance,
and the probability of loss on any reinsurance agreement tends to
be low. Reinsurance is commonly purchased to protect against
single claims in excess of the level prudently borne by an
insurer’s financial capacity. For example, a ceding company may
choose to reinsure all life insurance policies over $250,000
because it decides that $250,000 is the maximum risk that it can
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Last modified: May 25, 2011