What is reinsurance?

Reinsurance is fundamentally a type of insurance that insurance companies purchase to manage their risk exposure. When an insurance company underwrites policies, it takes on the risk that it will need to pay claims. To mitigate the potential impact of large losses, such as those resulting from natural disasters or significant liability claims, insurers can transfer portions of that risk to other insurance companies through reinsurance agreements.

This practice allows primary insurance companies to stabilize their finances and become more resilient to unpredictable events that could otherwise deplete their resources. By engaging in reinsurance, an insurer can protect itself against the financial strain of hefty claims, ensuring it can honor its commitments to policyholders while maintaining solvency.

The other options do not accurately describe reinsurance. Consumers do not typically take out reinsurance; instead, they purchase personal insurance to provide coverage for their own losses. A policy feature providing additional coverage might refer to endorsements or riders within a primary insurance policy but does not encompass the broader risk management strategy that reinsurance represents. Finally, while there is insurance against events causing widespread loss—such as catastrophe insurance—it is different from the concept of reinsurance that specifically involves transactions between insurers.