What does "ceding" refer to in surplus lines insurance?

Ceding refers to the practice of transferring risk from the primary insurer to a reinsurer. In the context of surplus lines insurance, which often covers risks that standard insurers may not want to underwrite, ceding allows the primary insurer to manage its risk exposure effectively. By transferring some of the risk associated with certain policies to a reinsurer, the primary insurer can stabilize its financial standing and continue to offer coverage without overexposing itself to potential losses.

This concept is crucial in surplus lines because such insurance typically involves higher risks or unique situations that may not fit within the constraints of standard insurance policies. By ceding these risks, insurers can participate in specialty markets while maintaining overall solvency and financial health.