What is reinsurance?

Reinsurance is defined as the transfer of risk between two insurers. This process allows an insurance company to manage its risk by transferring a portion of its coverage obligations to another insurer. Essentially, the primary insurer (the one that originally underwrites a policy) seeks reinsurance to protect itself from significant losses. By doing this, the primary insurer can maintain financial stability and increase its capacity to underwrite more policies, as they are mitigating the risk of having to pay large claims entirely on their own.

The mechanism of reinsurance helps establish a buffer within the insurance marketplace, providing not only risk management for insurers but also contributing to market stability. This relationship where one insurer effectively insures another is vital in ensuring that companies can endure significant claim payouts when large-scale disasters occur.

In contrast, other options like selling insurance to another broker, policy design processes, or claim adjustment processes do not capture the essence of what reinsurance entails. They involve different aspects of the insurance industry and do not relate to the fundamental concept of risk transfer and pooling that defines reinsurance.