What is reinsurance?

Reinsurance is fundamentally the process of transferring risk from one insurer to another. This arrangement allows insurance companies to manage their risk exposure more effectively. When an insurer underwrites a policy and assumes liability for potential claims, it may choose to mitigate that risk by purchasing reinsurance. By doing so, they can protect themselves against large losses that could exceed their ability to pay claims.

Reinsurers take on some of the risk in exchange for a premium, thus allowing the original insurer to free up capital and reduce its overall risk profile. This practice is essential for the stability of the insurance industry, particularly for handling catastrophic losses or large-scale insurance events.

The other options do not accurately represent the concept of reinsurance. For example, insurance for personal risks pertains exclusively to individual policies rather than risk management between insurers. A standard underwriting practice refers to the criteria and guidelines used to assess risk and determine premiums, which is separate from the concept of reallocating risk through reinsurance. Lastly, a method of marketing insurance does not relate to risk transfer but rather the strategies used to promote and sell insurance products.